On January 26, 2022, Dan Yu, treasurer for Integrated Circuits (IC), needed to decide between three financing options for a $200 million acquisition of Safe Technologies. The acquisition would significantly enhance IC’s capabilities and increase its chances of securing a major US Air Force contract that would accelerate company growth. Yu had to choose between a fixed-rate bullet loan, an amortizing loan, and a floating-rate loan. While interest rates were at a historically low level following the COVID-19 pandemic, the Federal Reserve was considering aggressive rate hikes, following a strong economy and rising inflation. Yu’s challenge was to select the best among the financing options, considering their borrowing costs, interest-rate risk, and rollover risk.
This partially fictionalized case allows instructors to introduce interest-rate risk and the relationship between spot rates and forward rates. Students gain exposure to calculating Macaulay duration and modified duration as they balance market expectations of future interest rates with the risk profiles of each loan option.
This case 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. It is also suitable for core finance offerings that cover valuation of liabilities and interest-rate risks. To successfully complete this case, students are expected to have a modest understanding of interest rates and bond pricing math.
