Essay on Corporate Bonds: Raising Debt Capital Through Financial Instruments

Bond is a financial instrument traded in stock exchanges. Corporations sell bonds to the public to raise debt capital. It may sell directly or use an intermediary such as an investment bank. It represents a legal, contractual agreement between the bondholder and the corporation. It is like borrowing money because the corporation repaid the principal amount at maturity and serviced by regular interest payments (Baulkaran, 2019). Bonds get valued by discounting at risk adjusted discount rates all future cash flows from it to determine the present value. Some bonds never mature like perpetual bonds, while others don't contain interest payments such as a zero-coupon bond. The paper evaluates bonds, bond valuation, and capital asset return of Apple Company.

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Apple Inc. is the successful and most outstanding company of the 21st century. It started in 1976 in California from a humble beginning. It is now worth more than 1.1 USD trillion company with the success brought by being a leading innovator in both fields of technology and finance(Baulkaran, 2019). The company utilizes its capital structure to adapt to different environments. It has been leveraging debt while increasing equity.

By June 29, 2019, current liabilities for Apple Company were 89.7 billion USD, which consist of account payables of $29.0 billion and short term notes and bonds worth $14.0 billion. Longer debts and long term obligations were $136 billion; thus all liabilities amounted to 225.8 billion USD (Baulkaran, 2019). It was a jump of approximately 63% from 2016.

Apple Inc. started issuing notes or bonds in 2013, a move motivated by zero interest rate policy borrowing environment (Podobas, 2019). It allocated $64.46 billion in debt worth for underwriting. The company did not need the capital. However, it was utilizing the opportunity of receiving free cash. The company's ratio of debt to equity has been increasing. For instance, it moved from 50% in 2016 to 112% in 2019.

Apple's bonds nominal interest rates in many cases are 3% or below. The real return of the bond instrument then barely beats inflation. Due to the accumulation of debt capital by Apple Company, has let to changing capital arrangement significantly. Over the last five years, the current asset to current liabilities and quick ratio ascended considerably by 33% for the current rate and 59% for the latter (Podobas, 2019). From 2016 to June 2019, the long term debt has doubled.

Apple Company value has doubled since late 2017. It improved from 600 billion USD from September 2017 to 1.12 trillion USD as of June 2019. The market cap and cash for Apple also have witnessed a steady rise. As of the second quarter of 2019, Apple's after deductions debt decreased from 50 billion USD in 2018 to $14 million as of June 2019(Baulkaran, 2019). The fact makes Apple the best cash-rich organization in the U.S. Having $50 billion as available quick cash and 45 million USD hold in short term securities, solvency in the firm remains strong. The high leverage should not cause concerns to investors for Apple's unseen future.

Apple bonds don't offer a specific accumulative value, but the issues that mature by 2025 appear to be as safe ad government bonds. However, the company has plenty of cash hoard, and the debt is smaller when compared (Podobas, 2019). The cash flow experienced is sufficient to cover all the interest payments for the debt. If the unfortunate occurs today to prevent future sales of iPads and iPhones, the cash on hand if sufficient to ensure no default on the bonds issued.

Apple bonds are issued and traded with low yield but spread over until maturity. It makes the company creditworthy, although the bonds are highly sensitive to interest rate changes (Podobas, 2019). Those who hold the bonds until maturity have less risky with Apple bonds, while those who wish to sell the bonds before maturity are exposed to bond market frustrations, which might not favor them. Longer-term bonds, due in 2046 or 2047, are safe as short term issued notes or bonds; however, the product mix raises concerns as they may become obsolete by 2047. Investors in long term bonds need to be confident that the company will innovate and offer preferred products continuously.

In the pricing of Apple bonds, demand was higher than the supply as investors piled $25 million orders. It lowered the compensation of the bonds that investors received later after pricing the bonds. The bankers and investors agree on the appropriate level of compensation to be applied, which is above the relevant risk-free Treasury mark (Podobas, 2019). The 30-year bonds are priced at a 3% yield.

Apple has experienced several trends of ups and down on its return on assets. Return on assets for Apple is calculated as net income divided by the average total assets. For the last twelve months before September 2019, recovery of support for Apple is 17.3%. Last five years (September 2015 to September 2019), Apple's return on asset averaged 16.2 % (Baulkaran, 2019). The operated median return on investments for Apple between 2015 and 2019 was 15.7%.

The highest return on assets was reported in September 2015 at 20.5% for the last five years, while the lowest was witnessed in 2017 at 13.9% (Podobas, 2019). Return on assets for the previous five years only increases in two years 2015 and 2018, while in 2016, 2017 and 2019, it decreased. During September 2018 to September 2019 fiscal year, Apple was the second highest with return in assets after Ubiquiti Inc., which has 42.8%. For companies operating in the information technology sector in the United States, Apple reported the highest return on assets accounting to 91.3% of the industry.

Conclusion

According to the findings, Apple Inc. is healthy performing compared to other corporations in the information technology industry. Apple's bonds, although are infrequently issued, attract a lot of demand to show investors' trustworthiness in the company. Apple has a high return on assets of 17.3% from the current physical year, which is an impressive performance (Podobas, 2019). It holds more cash and short term securities than its debts and bondholder has nothing to worry from their investments in the company.

References

Baulkaran, V. (2019). Stock market reaction to green bond issuance. Journal of Asset Management, 20(5), 331-340. https://link.springer.com/article/10.1057/s41260-018-00105-1

Podobas, W. J. (2019). The Inflation-Adjusted Tools for Historical Analysis of Asset Prices. Available at SSRN 3401890. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3401890