Bond

Valuation Solutions
Module 3
Bond Rates and Yields – SLIDE 3
Given: FORMULA:
Coupon Payment (CP) = P800 Bond value = CP
Face Value (F) = P10,000 (1+r)t
Rate (r) = 10%

Bond value = CP 0+ CP 0+ CP 0+ CP 0+ CP -
(1 + r) (1 + r)2 (1 + r)3 (1 + r)4 (1 + r)5
= P800 + P800 + P800 + P800 + P10,800
(1+0.10) (1+0.10)2 (1+0.10)3 (1+0.10)4 (1+0.10)5
= P727.27 + 661.16 + 601.05 + 546.41 + 6,705.95
= P9,241.84
Coupon Rate – SLIDE 4
Coupon rate = Coupon Payment Current price = P9,329.00
Face value Coupon Payment = P700
= P700 0
P10,000 Term = 10 years
= 0.07 or 7% Face value = P10,000
Bond Rates and Yields – SLIDE 4
Current yield = coupon payment Current price = P9,329.00
current market price Coupon Payment = P700
= P700 0 Term = P10 years
9,329.00 Face value = P10,000
= 0.075 or 7.5%
Yield to Maturity (YTM) – SLIDE 5
C [ ]
1
x 1 -
(1 + r) t
Bond value = +
F
(1 + r)t
r
Given Data:
P9,329.00 =
P700 x [ ]
1 - 1
(1 + 0.08)10
+
P10,000
Current price = P9,329.00 0.08 (1 + 0.08)10
Coupon Payment = P700
Term = 10 years = P700 x [ ] +
1 - 1
2.158924997272787 P10,000

0.08 2.158924997272787
Face value = P10,000
= P700 x 0.536806511915316 + P4,631.93
0.08
Let us compute for 8%. = P375.76 + P4,631.93
0.08
= P4,697.06 + P4,631.93
= P9,328.99
Valuing a Bond – SLIDE 6
Bond value =
[ ]
C x 1 - (1 + r)t
1
+
F
(1 + r)t
r
Given Data:
=
P1,000 x [. ] +
1 - 1
(1 + 0.10)20 P10,000
Coupon Payment = P1,000 0.10 (1 + 0.10)20
Term = 20 years
Face value = P10,000 = P1,000
x [ ] +
1 - 1
6.7274999493256 P10,000

0.10 6.7274999493256
Interest rate = 10%
= P1,000 x 0.851356371975856 + P1,486.44
0.10
= P851.36 + P1,486.44
0.10
= P8,513.56 + 1,486.44
= P10,000.00
A Discount Bond – SLIDE 7
C [ ]
1
x 1 -
(1 + r) t
Bond value = +
F
(1 + r)t
r
Given Data:
=
P1,000 x [ ]
1 - 1
(1 + 0.12)20
+
P10,000
Coupon Payment = P1,000 0.12 (1 + 0.12)20
Term = 20 years
Face value = P10,000 = P1,000
x [ ] +
1 - 1
9.646293093274934 P10,000

0.12 9.646293093274934
Interest rate = 12%
= P1,000 x 0.896333234919312+ P1,036.67
0.12
= P896.33 + P1,036.67
0.12
= P7,469.44 + 1,036.67
= P8,506.11
A Premium Bond – SLIDE 8
C [ ]
1
x 1 -
(1 + r) t
Bond value = +
F
(1 + r)t
r
Given Data:
=
P1,000 x [1 - 1
(1 + 0.08)20 ]+ P10,000
Coupon Payment = P1,000 0.08 (1 + 0.08)20
Term = 20 years
Face value = P10,000 = P1,000
x [ ] +
1 - 1
4.660957143849302 P10,000

0.08 4.660957143849302
Interest rate = 8%
= P1,000 x 0.785451792595943+ P2,145.48
0.08
= P785.45 + P2,145.48
0.08
= P9,818.15 + 2,145.48
= P11,963.63
Coupon Payment Computation – SLIDE 9
SMC1 SMC2
Coupon rate 2% (4% / 2) 5% (10% / 2)
Payment Term 20 (10 x 2) 20 (10 x 2)
Face Value P10,000 P10,000
YTM 4.5% (9% / 2) 4.5% (9% / 2)
Coupon Payment ? ?

Coupon Payment = Coupon rate x face value

SMC 1 = P10,000 X 0.02 = P200
SMC 2 = P10,000 X 0.05 = P500
 SLIDE 9 – Current Price Computation SMC 1
C x [ ]
1 Given Data:
1 -
(1 + r) t
F
Bond value = +
(1 + r)t coupon payments = P200
r YTM = 4.5%
=
P200 x [ ] +
1 - 1
(1 + 0.045)20 P10,000 Coupon rate = 2%
0.045 (1 + 0.045)20 Face Value = P10,000
Term = 20
=
P200 x [ ] +
1 - 1
2.411714024837409 P10,000

0.045 2.411714024837409

= P200 x 0.585357140315416 + P4,146.43

0.045
= P117.07 + P4,146.43
0.045
= P2,601.56 + 4,146.43
= P6,748.22
 SLIDE 9 – Current Price Computation SMC 2
C x [ ]
1 Given Data:
1 -
(1 + r) t
F
Bond value = +
(1 + r)t coupon payments = P500
r YTM = 4.5%
=
P500 x [ ] +
1 - 1
(1 + 0.045)20 P10,000 Coupon rate = 5%
0.045 (1 + 0.045)20 Face Value = P10,000
Term = 20
=
P500 x [ ] +
1 - 1
2.411714024837409 P10,000

0.045 2.411714024837409

= P500 x 0.585357140315416 + P4,146.43

0.045
= P292.68 + P4,146.43
0.045
= P6,503.97 + 4,146.43
= P10,650.40
 SLIDE 9 – Market Rate Rises by 2% SMC 1
C x [ ]
1 Given Data:
1 -
(1 + r) t
F
Bond value = +
(1 + r)t coupon payments = P200
r YTM = 5.5% (11% / 2)
=
P200 x [ ]
1 - 1
(1 + 0.055)20
+
P10,000 Coupon rate = 2%
0.055 (1 + 0.055)20 Face Value = P10,000
Term = 20
=
P200 x [ ] +
1 - 1
2.917757490604091 P10,000

0.055 2.917757490604091

= P200 x 0.657271036671056 + P3,427.29

0.055
= P131.45 + P3,427.29
0.055
= P2,390.08 + 3,427.29
= P5,817.37
 SLIDE 9 – Market Rate Rises by 2% SMC 2
C x [ ]
1 Given Data:
1 -
(1 + r) t
F
Bond value = +
(1 + r)t coupon payments = P500
r YTM = 5.5% (11% / 2)
=
P500 x [ ]
1 - 1
(1 + 0.055)20
+
P10,000 Coupon rate = 5%
0.055 (1 + 0.055)20 Face Value = P10,000
Term = 20
=
P500 x [ ] +
1 - 1
2.917757490604091 P10,000

0.055 2.917757490604091

= P500 x 0.657271036671056 + P3,427.29

0.055
= P328.64 + P3,427.29
0.055
= P5,975.19 + 3,427.29
= P9,402.48
 SLIDE 9 – Market Rate Falls by 2% SMC 1
C x [ ]
1 Given Data:
1 -
(1 + r) t
F
Bond value = +
(1 + r)t coupon payments = P200
r YTM = 3.5% (7% / 2)
=
P200 x [ ]
1 - 1
(1 + 0.035)20
+
P10,000 Coupon rate = 2%
0.035 (1 + 0.035)20 Face Value = P10,000
Term = 20
=
P200 x [ ] +
1 - 1
1.989788863465846 P10,000

0.035 1.989788863465846

= P200 x 0.49743411556833+ P5,025.66

0.035
= P99.49 + P5,025.66
0.035
= P2,842.48 + 5,025.66
= P7,868.14
 SLIDE 9 – Market Rate Falls by 2% SMC 2
C x [ ]
1 Given Data:
1 -
(1 + r) t
F
Bond value = +
(1 + r)t coupon payments = P500
r YTM = 3.5% (7% / 2)
=
P500 x [ ]
1 - 1
(1 + 0.035)20
+
P10,000 Coupon rate = 5%
0.035 (1 + 0.035)20 Face Value = P10,000
Term = 20
=
P500 x [ ] +
1 - 1
1.989788863465846 P10,000

0.035 1.989788863465846

= P500 x 0.49743411556833+ P5,025.66

0.035
= P248.72 + P5,025.66
0.035
= P7,106.20 + 5,025.66
= P12,131.86
 Percent Changes in Bond Prices – SLIDE 12

[ ]
Percent Change = New Present Value – Old Present Value X 100
Old Present Value
SMC 1 – From 9% to 7% SMC 2 – From 9% to 7%

[ ]
% Change = P7,868.14 – 6,748.22
P6,748.22
X 100 [ ]
% Change = P12,131.86 – 10,650.40 X 100
P10,650.40
= 16.60% = 13.91%
SMC 1 – From 9% to 11% SMC 2 – From 9% to 11%

[ ]
% Change = P5,817.37 – 6,748.22 X 100
P6,748.22 [ ]
% Change = P9,402.48 – 10,650.40 X 100
P10,650.40
= (13.79%) = (11.72%)