Value of Money: Bonds Present Value, Future

¶ … Value of Money: Bonds Present value, future value, and the discounted value of a stream of future revenues form the fundamental basis for one of the crucial underpinnings of finance dynamics; the time value of money. While the broad notion of the concept is the tenet that "all things being equal, it is better to have money now rather than later" (Carther, S.

September 1, 2008); this posit allows for a deeper and strategic insight into the world of finance, investment, and capital budgeting through analysis of the relative value of a dollar at a given time. In this context there is utility in analyzing the present and future value of a $2,000 Comcast bond issue in comparison with rivals such as AT&T, T-Mobile, and Verizon Communications.

How Much Would You Pay for This Bond Today? In the telecommunications industry, Comcast is a major player in providing access and content to its customer subscribers, and competes with rivals such as T-Mobile, AT&T, Verizon, and Time Warner. Comcast provides "video, high-speed Internet and phone services ("cable services") to residential and business customers in 51 million homes and businesses in 39 states and the District of Columbia" (Comcast.com. 2011).

Comcast's recent purchase of content provider NBC Universal, positions them to offer their customers an even broader platform of service options; accordingly as an investor there is considerable upside opportunity for this growing business (Comcast.com. 2011). With current global economic conditions: slow growth, high unemployment, low interest rates, Comcast like many large companies has the ability to borrow relatively inexpensively in the bond markets. An issuance of a bond to pay $2,000 in one year would command considerable investor demand given the company's positive forward looking earnings opportunities and competitive advantages.

The company's year over year Earnings per Share growth has expanded from .71 in 2006 to $1.29 in 2010 (Comcast.com. 2011), as such Comcast should enjoy continued top level revenue and bottom line profit growth. $1,900 would be an appropriate present sum to purchase the Comcast debt issuance for an expected return of $2,000 in one year's time. What Would Be The discount Rate for This Bond? To calculate rate for the bond in question the present value formula: PV= FV / (1+R) ^N is rewritten to solve for the rate: R= (FV/PV) ^ 1/N.

In the above case the value would be ($2,000 / $1,900) ^1-1…. And so the answer becomes 1.053. Comcast would offer a rate of 5.3% to an investor for one year given the $1,900 present value and $2,000 future value (Marshall, D. & McManus, W. 1996). Competitor Bond Issuances In the telecommunications space, AT&T provides Comcast with its heaviest competition, as the company's revenues exceeded 124 billion in 2010 (CNNMoney.com. 2011). AT&T does dominate the marketplace with its expansive network capacity and reach into the mobile device universe.

This question though is actually about why an investor would pay more than $2,000 for a bond issuance with a return of investment of $2,000 in one year? The answer is that the existing bond would carry a significantly higher coupon rate than current yielding bonds offered on the marketplace.

AT&T will have significant growth rates in the coming years which would place new issuance at a lower coupon rate however, an investor may jump at the opportunity to purchase a higher coupon rate on an existing bond by paying a premium to the face value. The investor would be compensated with a higher interest rate, and the bond might trade at a premium of $2,100.00 for a coupon rate significantly above the current offered market rate for debt.

Conversely, a Comcast competitor, T-Mobile which recently was eschewed by AT&T in a takeover attempt, will have difficulty competing in the telecommunications space as providing capacity and increasing infrastructure spend will prove cost prohibitive. Additionally, T-Mobile cannot compete with Comcast from a content platform which adds customer value. As an investor T-Mobile debt issuance would have to incorporate a significant discount in valuation to entice demand for its debt, perhaps $1,800.00 for a $2,000 return in one year.

Broader Concepts of Time Value of Money This exercise was designed to explicate the functionality of the time value of money. An investor would always take money now as opposed to sometime in the future because money can be invested and earn a rate of return. Imbedded in this concept are the notions of present value: "the current worth of a future sum of money or stream of cash flows.