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• Rohan Samria

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Copyright Walt Disney Company's Slepping Beauty Bonds-Duration Analysis-courseware Harvard Business School Case 294-038 Courseware 9-208-725 This courseware was prepared by Professor Carliss Y. Baldwin solely for students as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2008 President and Fellows of Harvard College. No part of this product may be reproduced, stored in a retrieval system, used in a spreadsheet or transmitted in any form or by any means— electronic, mechanical, photocopying, recording or otherwise—without the permission of Harvard Business School.

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Sleeping Beauty Basic Spreadsheet Calendar Year

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Relative Year

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Cash Flow per $100

7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55

Present Value interes t rate 75.50 10% 88.31 8.55% 100.00 7.55%

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Each Cash Flow

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Sleeping Beauty Present Value as a Function of the Interest Rate Calendar Year

Relative Year

Cash Flow per $100

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27

7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55

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Interest Rates 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 100% 500% 1000%

Present Values $339.20 $243.54 $186.85 $150.55 $125.74 $107.84 $94.38 $83.89 $75.50 $68.64 $62.92 $58.08 $53.93 $50.33 $47.19 $44.41 $41.94 $39.74 $37.75 $7.55 $1.51 $0.76

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the Interest Rate

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Sleeping Beauty Bonds of Different Maturity Calendar Year

Relative Year

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39

Cash Flow per $100 Sleeping Napping Beauties Beauties

7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55

7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 7.55 107.55

Interest Rates 2% 3% 4% 5% 6% 7% 7.55% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%

if investor doesnot find prod

after 10 years if interest rate

for a fluctuation in interest r

120.00 100.00 80.00 60.00 40.00 20.00 0.00 1

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2

3

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Present Value Sleeping Napping Beauties Beauties $339.20 $243.78 $186.99 $150.61 $125.76 $107.85 $100.00 $94.38 $83.89 $75.50 $68.64 $62.92 $58.08 $53.93 $50.33 $47.19 $44.41 $41.94 $39.74 $37.75

$149.85 $138.81 $128.79 $119.69 $111.41 $103.86 $100.00 $96.98 $90.69 $84.95 $79.68 $74.86 $70.43 $66.36 $62.61 $59.16 $55.98 $53.04 $50.32 $47.80

if investor doesnot find product is not different, he wont pay different after 10 years if interest rates remains same, the price of the bond will remain same for a fluctuation in interest rates, sleeping beauty will have greater variation in prices then napping beauty

120.00 100.00 80.00 60.00 40.00 20.00 0.00 1

2

3

4

5

6

7

8 Page 6

9

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Present Value

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Present Value of a 100-year and a 10-year Bond as a Function of the Interest Rate $200.00

100-year bonds

$150.00

$100.00

10-year bonds

$50.00

$0.00 2%

3%

4%

5%

6%

7%

8%

9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%

Interest Rate

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Sleeping Beauty Calculation of Duration Calendar Year

Relative Year Sleeping Beauties Interest Rate Duration (in Years)

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39

7.55%

10-Year Bond

30-Year Bond

7.55%

7.55%

14.24

7.02 6.53 6.07 5.64 5.25 4.88 4.54 4.22 3.92 3.65 3.39 3.15 2.93 2.73 2.53 2.36 2.19 2.04 1.89 1.76 1.64 1.52 1.42 1.32 1.22 1.14 1.06 0.98 0.91 0.85 0.79 0.74 0.68 0.64 0.59 0.55 0.51 0.48 0.44

7.37

7.02 6.53 6.07 5.64 5.25 4.88 4.54 4.22 3.92 51.94

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519.41

12.64

7.02 6.53 6.07 5.64 5.25 4.88 4.54 4.22 3.92 3.65 3.39 3.15 2.93 2.73 2.53 2.36 2.19 2.04 1.89 1.76 1.64 1.52 1.42 1.32 1.22 1.14 1.06 0.98 0.91 12.11

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2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 2048 2049 2050 2051 2052 2053 2054 2055 2056 2057 2058 2059 2060 2061 2062 2063 2064 2065 2066 2067 2068 2069 2070 2071 2072 2073 2074 2075 2076 2077 2078 2079 2080 2081 2082

40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89

0.41 0.38 0.36 0.33 0.31 0.29 0.27 0.25 0.23 0.21 0.20 0.18 0.17 0.16 0.15 0.14 0.13 0.12 0.11 0.10 0.10 0.09 0.08 0.08 0.07 0.07 0.06 0.06 0.05 0.05 0.05 0.04 0.04 0.04 0.03 0.03 0.03 0.03 0.03 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.01 0.01 0.01 0.01

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2083 2084 2085 2086 2087 2088 2089 2090 2091 2092 2093

90 91 92 93 94 95 96 97 98 99 100

0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.07

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30-Year Zero 7.55%

30.00 sensitivity (modified duration zero bond is highly sensitive 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 100

13.235891737

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Sleeping Beauty Sensitivity Up Calendar Year

Relative Sleeping Year Beauty

10-Year Bond

30-Year Bond

30-Year Zero

8.55%

8.55%

8.55%

8.55%

88.31 -11.69%

93.45 -6.55%

89.30 -10.70%

75.76 -24.24%

6.96 6.41 5.90 5.44 5.01 4.61 4.25 3.92 3.61 3.32 3.06 2.82 2.60 2.39 2.21 2.03 1.87 1.72 1.59 1.46 1.35 1.24 1.14 1.05 0.97 0.89 0.82 0.76 0.70 0.64 0.59 0.55 0.50 0.46 0.43 0.39 0.36 0.33

6.96 6.41 5.90 5.44 5.01 4.61 4.25 3.92 3.61 47.35

6.96 6.41 5.90 5.44 5.01 4.61 4.25 3.92 3.61 3.32 3.06 2.82 2.60 2.39 2.21 2.03 1.87 1.72 1.59 1.46 1.35 1.24 1.14 1.05 0.97 0.89 0.82 0.76 0.70 9.18

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 75.7561

Interest Rate Value @ 8.55% % Ch. In Value 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38

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2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 2048 2049 2050 2051 2052 2053 2054 2055 2056 2057 2058 2059 2060 2061 2062 2063 2064 2065 2066 2067 2068 2069 2070 2071 2072 2073 2074 2075 2076 2077 2078 2079 2080 2081

39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88

0.31 0.28 0.26 0.24 0.22 0.20 0.19 0.17 0.16 0.15 0.14 0.12 0.12 0.11 0.10 0.09 0.08 0.08 0.07 0.06 0.06 0.05 0.05 0.05 0.04 0.04 0.04 0.03 0.03 0.03 0.03 0.02 0.02 0.02 0.02 0.02 0.02 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01

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2082 2083 2084 2085 2086 2087 2088 2089 2090 2091 2092 2093

89 90 91 92 93 94 95 96 97 98 99 100

0.01 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.03

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Sleeping Beauty Sensitivity Down Calendar Year

Relative Sleeping Year Beauty

10-Year Bond

30-Year Bond

30-Year Zero

6.55%

6.55%

6.55%

6.55%

115.24 15.24%

107.17 7.17%

112.99 12.99%

132.35 32.35%

7.09 6.65 6.24 5.86 5.50 5.16 4.84 4.54 4.27 4.00 3.76 3.53 3.31 3.11 2.92 2.74 2.57 2.41 2.26 2.12 1.99 1.87 1.75 1.65 1.55 1.45 1.36 1.28 1.20 1.13 1.06 0.99 0.93 0.87 0.82 0.77 0.72 0.68

7.09 6.65 6.24 5.86 5.50 5.16 4.84 4.54 4.27 57.03

Interest Rate Value 6.55% % Ch. In Value 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38

7.09 0 6.65 0 6.24 0 5.86 0 5.50 0 5.16 0 4.84 0 4.54 0 4.27 0 4.00 0 3.76 0 3.53 0 3.31 0 3.11 0 2.92 0 2.74 0 2.57 0 2.41 0 2.26 0 2.12 0 1.99 0 1.87 0 1.75 0 1.65 0 1.55 0 1.45 0 1.36 0 1.28 0 1.20 0 16.03 132.3454

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2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 2048 2049 2050 2051 2052 2053 2054 2055 2056 2057 2058 2059 2060 2061 2062 2063 2064 2065 2066 2067 2068 2069 2070 2071 2072 2073 2074 2075 2076 2077 2078 2079 2080 2081

39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88

0.64 0.60 0.56 0.53 0.49 0.46 0.43 0.41 0.38 0.36 0.34 0.32 0.30 0.28 0.26 0.25 0.23 0.22 0.20 0.19 0.18 0.17 0.16 0.15 0.14 0.13 0.12 0.11 0.11 0.10 0.09 0.09 0.08 0.08 0.07 0.07 0.06 0.06 0.06 0.05 0.05 0.05 0.04 0.04 0.04 0.04 0.03 0.03 0.03 0.03

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2082 2083 2084 2085 2086 2087 2088 2089 2090 2091 2092 2093

89 90 91 92 93 94 95 96 97 98 99 100

0.03 0.03 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.01 0.19

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Sleeping Beauty The Relation between Duration and Interest Rate Sen Sleeping Beauty

10-Year Bond

30-Year Bond

30-Year Zero

% Ch if Rate Down 1%

15.2%

7.2%

13.0%

32.3%

Duration

14.24

7.37

12.64

30.00

-11.7%

-6.5%

-10.7%

-24.2%

% Ch. If Rate Up 1%

In a short term bond, the average duration changes drastically wher

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n and Interest Rate Sensitivity

ge duration changes drastically where as in long term bond the averge duration change slowly so the senstivity changes slo

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ly so the senstivity changes slowly in long term bond

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