Case Study on Amazon Bonds

This is a case study on Amazon bonds. Amazon.com, Inc. is a retailer of consumer products and subscriptions in North America and around the world. Amazon.com, Inc. was established in 1994 and is based in Seattle, Washington. In the United States, it is classified as an Internet Retailer and is traded on the NASDAQ Exchange. It has 1271000 employees. (Amazon, 2020).

Amazon saves customers time. It also offers advertising to retailers, suppliers, publishers, authors, and others through programs like sponsored ads, display, and video advertising. Amazon serves a primary set of customers in each of our divisions, which includes consumers, merchants, developers, businesses, and content providers. Amazon’s net income in 2020 was $21.3 billion (Amazon, 2020).

Amazon issues corporate bonds to fund its operations. Most Amazon bonds are classified based on their maturity date, which is the date on which Amazon Inc is required to pay back the principal to investors. Maturities can be classified as short-term, medium-term, or long-term (more than ten years). Longer-term bonds typically offer higher interest rates, but they may also carry additional risks. Amazon Inc uses the proceeds from bond sales for a variety of purposes, including financing continuing mergers and acquisitions, purchasing new equipment, investing in research and development, repurchasing their shares, paying dividends to shareholders, and even repaying current debt. (Amazon, 2021).

A potential investor would determine the value and risk of a bond through the risk-return assessment method. This method involves using a yield curve. In an example using Amazon bonds, the yield curve tells you how bond investors perceive the future and can help you predict where interest rates will go on the bond. A yield curve connects the total return expected from bonds of similar types at various maturities. From an investor’s standpoint, the yield curve can also reflect how future interest rates are perceived. In some cases, the yield curve can be an early warning sign of imminent problems.

The usual yield curve is slightly slanted upward, with larger predicted returns as maturity length increases (i.e., 10 years > 5 years). This is mostly due to the risk connected over time. The assumption in this yield curve is that the economy would expand, which means that longer-term bonds would be unfavorable for investors who are locked into an interest rate that is predicted to rise in the coming years. As a result, shorter-term bonds tend to rise when the economy is expected to expand.

The inverted yield curve is slightly sloped downward, with lower expected returns as maturity length increases (i.e., 10 years 5 years). The assumption in this yield curve is that there will be an economic recession, which means that longer maturity bonds would be advantageous for investors since they would receive a consistent interest rate despite the expected reduction in interest rates. As a result, longer-term bonds tend to climb in times of an oncoming economic slump.

The application of the concept value of the time value of money as it applies to company bond offerings. This concept seeks to provide interest to bonds offerings of investors in a specific period compared to the initial money the investor invested in bonds. In the concept of time value for money you look at future value versus present value and the present value of a bond, offering is found by discounting and compounding in future value (Zutter, 2016).

In the present value, you take the current value of a bond that you would have invested today with a given interest rate over a certain time to equal the future amount. It is based on the idea that a bond today is worth more than a dollar tomorrow. In the correlation of the present value of a bond, you look at a discount and the higher discount the more money you lose over time on the value of the bond. In discounting all future cash flows are taken and reduced to the current value and this will help an investor find the current value of a bond offering. The reason behind this is that money in the future is not the same as today (Zutter, 2016).

Annuities also apply to the concept of time value for money in bond offerings. Annuities equal cash flows in a set time. An example in an Amazon bond offering is an investor receiving a certain sum after a said period. An annuity due on a bond will always be higher because of compounding for an added period though it comes at the start of the time. An example would be how a person is paid before the start of a work period and in this case of a bond offering the sum is paid on the bond at the start of the offering. An ordinary annuity on the application on a bond offering cash flow comes at the ending of the set time. An example would be the way a salary is paid at the end of the month and it would apply to an Amazon bond as agreed between the investor and Amazon. (Zutter, 2016)

The future value for a bond offering is found by compounding and this involves the use of interest rates over a while. Compounding takes a look at the future value of the bond offering and this determines how much the corporation will pay and what the investor will get from the bond. The future value of a bond for a certain period involves earning interest at a certain rate. That is found by using compounding interest on a bond over a time the bond was specified. The more time a bond offering has the more compounding is found on the bond. (Zutter, 2016).

References

Zutter, C. (2016). Time Value of Money Part One (Chapter 5) [Video]. Retrieved 4 October 2021, from https://www.youtube.com/watch?v=3cGLlF9c3Zk.

Amazon. (2020). Amazon Annual Report 2020. Retrieved from https://www.annualreports.com/HostedData/AnnualReports/PDF/NASDAQ_AMZN_2020