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In the summer of 2023, Google (a subsidiary of Alphabet Inc.) was planning to issue a $50 billion bond to fund R&D. Bruno Santos, a recent MBA graduate and new senior analyst in Google’s treasury division, was tasked with recommending whether Google should use fixed-rate bonds, floating-rate bonds, or a hybrid solution using interest-rate swaps. Despite having substantial cash reserves, Google’s leadership preferred issuing debt to preserve cash for existing commitments and economic downturn protection. The move also needed to align Google’s leverage with its competitors, potentially optimizing its capital structure and lowering its cost of capital. The interest-rate landscape was unprecedented in recent memory. Following its most aggressive interest-rate-hike campaign ever, the Federal Reserve was rumored to be considering cutting the cost of money. Market expectations of the timing of rate adjustments, however, were changing on a weekly basis. Santos’s analysis was set to be scrutinized by CFO Ruth Porat, and the high stakes of the decision required a thorough evaluation of interest-rate risk management strategies. The goal was to ensure the bond issuance would support Google’s financial stability and competitive positioning in the tech industry. This case introduces students to interest-rate swaps and their use as hedges. Students gain experience calculating swap rates, determining the interest schedule of various debt instruments, evaluating hedging strategies in a volatile interest-rate environment, and utilizing the yield curve to interpret market expectations to evaluate different debt issuance strategies. It has been successfully taught at the University of Virginia Darden School of Business in the “Valuing a Company’s Options and Debt” module of “Valuation in Financial Markets,” an elective finance course in the MBA program. This case also makes for an ideal introduction to interest rate–linked assets in an elective course on financial derivatives, for undergraduate, graduate, and executive education finance courses.
Explore the relationship between spot rates, forward rates, and the yield curve, and connect forward rates to expectations on future monetary policy. Understand how interest-rate swaps are priced and how their rates relate to movement in the spot and forward rate curves. Calculate (1) fixed-rate coupon payments and (2) hedge payments for floating-rate bonds. Show that financial engineering (interest-rate swaps) can be used to achieve any combination of the two. Develop an appreciation for the strengths and weaknesses of fixed, floating, and hedged issuance strategies by considering various interest-rate scenarios.