Introduction to Corporate Finance

what companies do

FORREST GUMP BONDS

When Forrest Gump uttered the memorable line,

‘Life is like a box of chocolates – you never know what

you’re gonna get,’ no one could have imagined how

the British confectionery company, Hotel Chocolat,

would put that notion into practice. Founded as

a catalogue company over 20 years ago, Hotel

Chocolat needed £5 million for a major expansion

starting in July 2010. That sum was too small to justify

the costs of a traditional bond issue. The company

could have borrowed the money from a bank,

but at the time, lending standards were tight, and

management did not want to pay the relatively high

interest rate that they believed a bank would charge.

Instead, Hotel Chocolat issued its own

promissory notes, raising money from its existing

customers who were members of its ‘Tasting Club’.

Club members could purchase a £2,000 note

paying 6.72% interest, or a £4,000 note paying

7.29% interest. What made these notes unique

was that they did not make interest payments in

cash. Instead, investors received a monthly box

of chocolates with a retail value equivalent to the

stated interest rate. After three years, investors

could redeem the notes and get their original

investment back – in cash.

The idea has succeeded, with further issues of

these bonds with ‘payment in kind’ attached. By

selling these new bonds, Hotel Chocolat will use the

funds raised to expand its manufacturing and retail

operations, fund international expansion, increase

employment (it already employs over 1,000 workers

in the UK) and further develop Rabot Estate, the

firm’s cocoa plantation in Saint Lucia.

Sources: Bruce Watson, ‘Chocolate Bonds Offer a Uniquely Tasty

Dividend’, Daily Finance, 22 July 2010; Dean Best, ‘Hotel Chocolat’s

Chocolate Bond’, Just-Food, 24 May 2010; and ‘Hotel Chocolat

bonds: earn 7.33% a year interest ... in chocolate’, MSN News,

8 June 2014. http://www.msn.com/en-gb/news/other/hotel-chocolat-bonds-

earn-733percent-a-year-interest-in-chocolate/ar-AA5EXKV. Accessed

12 October 2015.

VALUING BONDS

4-1 Valuation basics

4-2 Bond prices and interest rates

4-3 Types of bonds

4-4 Bond markets

4-5 The term structure of interest rates

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