Investors flock to Apple’s $12 billion debt offering.
The demand for Apple’s new bond issues with maturities ranging from three to thirty years and rated double-A-plus, the second highest rating, reflects a corporate-debt market that is putting in a surprisingly strong performance this year. The rate for Apple’s 3-year bonds was 1.068 percent; the rate for 30-year bonds was 4.483 percent–about 1 percent more than U.S. Treasury securities.
Although Apple has a healthy cash pile, about $150 billion, it chose to issue bonds to pay for expanding its stock buyback program and increasing its dividend to stockholders. According to many experts, the fact that Apple has such a large cash surplus and is currently the most valuable U.S. firm based on stock-market value helped assure bond buyers that there is little risk in Apple bonds.
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- Remind students that once a bond is issued, the price can increase or decrease because of the inverse relationship between a bond’s price and overall interest rates in the economy. (Higher interest rates in the economy = lower prices for existing bonds; and, lower interest rates in the economy = higher prices for existing bonds.)
- Explore different reasons why Apple chose to issue bonds instead of using some of its cash surplus. (Reasons include taxation of cash held in off-shore accounts and financial leverage.)
- Apple chose to sell bonds to fund its share buyback program and increase dividends to stockholders. What are the advantages of selling bonds instead of using part of its cash surplus?
- Why would a short-term bond pay lower interest than a long-term bond?
- Given your current age and financial situation, would you invest in Apple corporate bonds? Why?