Apple Incorporation Bonds Decisions

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Table of Contents

Introduction
The amount of bond to be paid at present
The value of bond-credit after one year
Reasons for paying more or less for the bonds
Lessons Learnt
Works Cited

Introduction

Basically, Apple Inc. belongs to a very competitive industry where technological changes incessantly occur. The level of competitiveness increases the risk of losing investments made. Therefore, the company stands a chance of making losses which makes it unable to fund its long-term interest bearing loans (Apple Inc. 21). Any financial dealings involving any future decisions must take into consideration the high risk a company encounters due to competitiveness.

The amount of bond to be paid at present

The amount that will be paid today is $1818 given 10% interest rate and 1year time change. The high interest rate increases the discounting factor which is a major determinant of the present values (FinanceProfessor.com 1). High discount rates decrease the present value. Higher interest rates means that the company is prone to risks. However, increase in time reduces the discounting factor thereby reducing the value of the amount invested. As time elapses, the money value decreases.

The value of bond-credit after one year

Suppose Apple Inc. provides this bond at an interest rate of 10%, then the current value will be: PV = CF/FV*(1/ (1+r)^t), where CF is future cash flow, FV is the future value, R is the interest rate and t is time.

Hence, PV = 2000 * (1/ (1 + 0.1)

= 2000 * (1/ 1.1)

= 2000 * 0.91

= $1818

The term (1/ (1+r)^t) in the equation is the discount rate or discounting factor and it represent the present dollar value. It is determined by the interest rate r and time t. High interest rate increases the discount rate, hence a reduction in future cash flows or net present value (Econedlink.org 1). High interest rate means the company faces high risk. In this case however, the discounting factor is 0.91.

Reasons for paying more or less for the bonds

Apple Inc. faces competition from companies such as Hewlett-Packard and Hitachi Ltd (Apple Inc. 21). Suppose Hewlett-Packard pays for the bond at price less than $2000 of the present value while Hitachi pays more than $2000 of the present value. Hewlett will pay less for this bond because of the higher interest rate the company offers for its bonds. As discussed above, the higher the interest rate, the greater the discount rate that in effect reduces the net present value (Needles and Powers 468). Higher interest rate is correlated to the company risk. This implies that, Hewlett is highly risky as compared to Apple.

Conversely, Hitachi will pay higher present value as compared to Apple because it is risk averse. This means that the interest rates tied to long-term interest bearing loans or marketable securities are extremely low. Holding all other factors constant, interest rate determines the net present value of any particular investments (Needles and Powers 468).

Lessons Learnt

Interest rates and time significantly determines the net present value of any investment. Interest rates of the company’s long-term investments are closely related to the company risks. For instance, higher risk means greater interest rates (Financeprofessor.com 1). High interest rate increases the discounting factor which in turn reduces the present value. Time is also a major factor. Long time correlates to less net present value of investments. These factors also explain why the present value of money is higher than the future value.

In the case of Apple Inc., the Company is open to credit risk as well as interest rate fluctuations as regards to its invested portfolio market-value. Moreover, other external factors including instability in the global financial markets, increasing rate of inflation and low interest rates reduces the rate of future investment portfolios (Apple Inc. 21). Due to these factors, any investment in terms of long-term interest bearing loans such as bonds will have lower prospective returns.

Works Cited

Apple Inc. 2010 Annual Report. PDF file. Web.

Econedlink.org. n.d. The Time Value of Money. n.d. Web. 2012.

FinanceProfessor.com. n.d. Future Value. n.d. Web. 2012.

Financeprofessor.com. n.d. Time Value of Money. n.d. Web. 2012.

Needles, Belverd and Powers Marian. Financial Accounting. Farmington Hills, MI: Cengage Learning, 2008. Print.

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