Bond ratings for Microsoft and Google

May 25

According to the morningstar website, both Microsoft and Google have high bond ratings, with Microsoft slightly higher.

Microsoft Google
Morningstar Credit Rating AAA AA
Amt Outstanding $16.9 Bil $3.0 Bil
Debt/Assets 10.58% 5.31%

Based on the ratings, the bond market appears to favor more experienced borrowers, since from a debt load perspective, Google has better standing. Google’s entire bond issue is encompassed in just three bonds with the longest maturation in 2021. It’s also interesting that all three mature on May 19.

Duration

Duration is calculated the weighted average of the present values of all future cash flows. It can be represented by the following equation (ref), where PV is the present value.

Duration=\frac{1 \times PV(C_1)}{PV} + \frac{2 \times PV(C_2)}{PV} + \frac{3 \times PV(C_3)}{PV} + \cdots + \frac{T \times PV(C_T)}{PV}

 

Calculations like this are easily done in Excel. For this exercise I chose bonds that mature in 2016 and payout semi-annually for both Google and Microsoft.

Microsoft bond duration

Microsoft
Coupn 2.500%
Par $1,000.00
Maturity 2/8/2016
Frequency semi-annual
Discount rate 2.38%
1 2 3 4 5 6 Total
8/8/2013 2/8/2014 8/8/2014 2/8/2015 8/8/2015 2/8/2016
Payment $25.00 $25.00 $25.00 $25.00 $25.00 $1,025.00
PV(Ct) $24.42 $23.85 $23.30 $22.76 $22.23 $890.09 $1,006.64
PV(Ct)/PV 0.0243 0.0237 0.0231 0.0226 0.0221 0.8842
Duration 0.0121 0.0237 0.0347 0.0452 0.0552 2.6527 2.8236

Google bond duration

Google
Coupon 2.125%
Par $1,000.00
Maturity 5/19/2016
Frequency semi-annual
Discount rate 2.04%
1 2 3 4 5 6 Total
11/19/2013 5/19/2014 11/19/2014 5/19/2015 11/19/2015 5/19/2016
Payment $21.25 $21.25 $21.25 $21.25 $21.25 $1,021.25
PV(Ct) $20.83 $20.41 $20.00 $19.60 $19.21 $904.71 $1,004.75
PV(Ct)/PV 0.0207 0.0203 0.0199 0.0195 0.0191 0.9004
0.0104 0.0203 0.0299 0.0390 0.0478 2.7013 2.8486

Based on the data above, the duration for the Google bond is higher than for the Microsoft bond, however the difference is slight. You can download the original spreadsheet here: corporate-finance-project-bond-duration

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