This case is about government bonds, using specific bonds issued by the UK Government. It can be used to teach the basics of time value of money and discounting cash flows. But it can also be used to delve into fundamental issues surrounding bond valuation and bond pricing methodologies, as well as to explore more general topics such as corporate financing. Finally, the case serves as an introduction to the yield curve, its role and interpretation, an understanding of the risk of investing in bonds, and a discussion on risk-free rates and sovereign risk. The case provides the opportunity to emphasize important concepts such as:
- Time value of money
- Net present value (NPV) and internal rate of return (IRR)
- Valuing bonds by discounted cash flows (DCF)
- Difference between yield to maturity (YTM) and coupon rate
- Above or below par
- Relative attractiveness of long vs. short bond maturity and when it is most appropriate to use each type
- Liquidity and bond pricing
- Yield curve shape
- Sovereign bond spreads.
Participants will also have the chance to work on several practical problems during class, such as:
- Discounting cash flows and computing NPV
- Estimating the yield to maturity for a given price and coupon rate (e.g. IRR)
- Understanding the risk of investing in bonds with different maturities.
This case has been used effectively with MBAs and executives alike, in sessions running from 90 minutes to three hours, and with audiences from around the world. The case is also suitable for distance learning programs, including online degree and post-graduate courses in basic finance.