03 TASK PERFORMANCE 2

I.

1. Entero Company issued bonds with a 6% nominal rate for a Php 1,000 par value bond payable for
six(6) years. The bonds were sold for P1,250. How much is the interest rate of the said bond in
the market?

𝑉−𝑀
𝐼+(
𝑖= 𝑛 𝑥 100%
)
𝑉+𝑀
2
( ) 1,000 − 1,250
1,000 (6%) + ( )
= 6 𝑥 100%
1,000 + 1,250
2
−250
60 + )
( 6 𝑥 100%
=
2,250
2
60 – 41.7
=
1125 𝑥 100%
18.3
=
1125 𝑥 100%

𝑖 = 1.63 %
 𝐼+(
𝑖= 𝑛 𝑥 100%
)
𝑉+𝑀
2
( ) 1,000 − 700
2.1,000
Assume(6%) + ( that 10
instead )
Entero Company issued bonds with a 6% nominal rate for a P1,000 par value
= 𝑥 100%
bond payable
1,000 +for700
10 years. The bonds were sold for P700. How much is the interest rate of the said
2
bond in the market?
300
60 + 10 )
( 𝑥 100%
=
𝑉−𝑀
1,700
2
60 − 30
= 𝑥 100%
850
30
=
850 𝑥 100%

𝑖 = 3.53 %
II.
1. The Philippines once again received a credit rating upgrade from Moody’s. Its bond yields went down

Interpretation
 Consequently, bonds with the highest quality credit ratings always carry the lowest yields; bonds with lower
credit ratings yield more. Note that the yield, in a sense, provides a scale of credit-worthiness:
higher yields generally indicate higher risk-the higher the yield, the higher the risk.

2. The Duterte administration starts to push through with its infrastructure projects. The government decides to hype
borrowings. Government bond yields went up by 50 bps.

Interpretation
 Increase in credit rating will increase the price of the bond. Many critics have pointed out that for Duterte to fund
his infrastructure projects, the government would have to increase its spending or resort to more loans, both of
which would increase the country’s external and government debt. An external debt, is the total debt a country
owes to foreign creditors such as commercial banks, foreign governments or international financial institutions.
Meanwhile a government debt is when government spending exceeds government receipts.

3. San Mig Company experiences liquidity pressures due to the 2-month lockdown. Its bond that was issued two
(2)_years ago with a coupon rate of 4% is now trading at 7% yield.

Interpretation
 Diversified conglomerate San Miguel Corporation (SMC) reported a net loss of P4 billion for the first
half of 2020 from a P26.59 billion profit in the same period last year due to the lockdown and alcohol
ban during imposed to curb the spread of the COVID-19 pandemic. In a statement, SMC said
consolidated revenues amounted to P352.8 billion, 31 percent lower from last year while consolidated
operating income declined by 74 percent at P14.9 billion.

III.
1. The Philippines’ slower than expected Gross Domestic Product (GDP) growth has resulted in a flattening of
the yield curve. Investors are buying long-term bonds, which decreased its yield; thus, increasing bond prices.
Short-term bonds, on the other hand, has remained the same.

a. Why are bond investors buying the long-end more? Use the pure expectations theory in explaining your
answer.
Explanation: According to the pure expectation theory, future long term rates are an everage of anticipated
short term rates with the same total maturities. It is perfectly rational to expect the interest rates to fall
during recession.

b. Although not all the time, why is flattening of the yield curve signifies a recession?
Explanation: If there is going to be a recession, fewer people will want to borrow money because there is
less economic activity, which means there's less need to borrow and therefore lower demand. That's why a
flattening or inverted yield curve predicts a recession, money lenders see it in the future. Of course, this
assumes that markets are always correct in predicting the future and that markets always operate efficiently.
2. The recent COVID-19 has put the country on lockdown for three (3) months. The Bangko Sentral ng
Pilipinas (BSP) implemented a series of rate cuts in 2020 from 4% at the start of the year to only 2.25% by
June. Why did the BSP decide to decrease policy rates?

Explanation: THE BANGKO Sentral ng Pilipinas (BSP) kept its key interest rate at a record low for a fifth
straight meeting on Thursday, as it vowed to maintain an accommodative stance to support economic
recovery. The central bank reiterated its support for the Philippine economy for as long as necessary to
ensure its strong and sustainable recovery. The Monetary Board believes that sustained monetary policy
support for domestic demand should help the economic recovery gain more traction, especially as risk
aversion continues to temper credit activity despite ample liquidity in the financial system.