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05 Task Performance 2 FM

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19 views

05 Task Performance 2 FM

Uploaded by

j.20032508
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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BM2004

TASK PERFORMANCE (50 POINTS)

I. PARTICIPANTS IN THE BOND MARKET (20 points: 4 items x 5 points)


Discuss the participation of the following institutions in the bond market and cite at least on

1. Commercial Banks

Both buyers and sellers from commercial banks participate in the bond market. To earn income and
manage their balance sheet, they frequently add bonds to their investment portfolio. They also serve as
underwriters, assisting businesses and governments in issuing bonds to raise money. Commercial banks
also assist their customers in trading bonds and offer bond investment advising services.

2. Mutual Funds

Mutual funds are key players in the bond market, investing money from a pool of investors in a variety
of bonds, such as corporate, municipal, and government bonds. They give investors the chance to access
diversified bond portfolios that match their investing goals and risk tolerance. Bond portfolios can be
actively managed by mutual funds, which can purchase and sell bonds to meet specified investment
objectives while giving shareholders liquidity and income.

3. Investment Banking Firms

Investment banking firms play an important role in the bond market by helping businesses and
governments issue bonds to raise funds. They assist in the distribution of bonds to investors, underwrite
bond offers, and give advisory services on bond structuring and pricing. Investment banking firms
connect buyers and sellers in the secondary bond market by acting as middlemen and trading bonds for
their own accounts.

4. Insurance Companies

Insurance companies participate in the bond market as major institutional investors, deploying their
policyholders' premiums into various types of bonds to generate income and manage their investment
portfolios. They often invest in high-quality and investment-grade bonds to ensure the safety and stability
of their investment holdings. By holding bonds in their portfolios, insurance companies aim to achieve
consistent returns to meet their long-term liabilities, such as policyholder claims and benefits.

Example:

A commercial bank may purchase corporate bonds issued by a large manufacturing company to diversify its
investment portfolio while earning a steady stream of interest income. A mutual fund may invest in a mix of
government and municipal bonds to offer its investors a balanced and diversified bond portfolio. An investment
banking firm may underwrite a municipal bond offering for a local government to fund infrastructure projects,
helping to price the bonds and sell them to investors. An insurance company may invest in a portfolio of highly
rated government bonds to ensure the stability and security of its investment assets while fulfilling its long-term
financial obligations to policyholders.

05 Task Performance 2 *Property of STI


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BM2004

II. BOND VALUATION (30 points: 6 items x 5 points)


Give what is asked in the problem. Write your solutions in the space provided.

1. Karim Mabait issues a P1,000 corporate bond with an annual interest rate of 5%, making semi-annualinterest payments for 2
years. The bond’s yield to maturity is 3%.

I= M x Nominal Interest RateI = 1,000 x


5% / 2
I = 1,000 x 0.025
I = 25

a. What is the present value of the coupon payments?

Pva= Coupon payment *[1 - (1+r)-n]/r


r (Interest rate per period) = 3%/2 = 1.5% = 0.015n = (Number of
period) = 2 years * 2 = 4
Annual coupon payment = Face value*Stated interest rateAnnual coupon
payment = P1000 * 5% = P50
Semi-annual coupon payment = P50/2 = P25
Present value of the coupon payments = P25 * [1 - (1 + 0.015)-4]/0.015 Present value of the
coupon payments = P25*3.854385
PVᴀ = ₱96.36

b. What is the present value of the face value of the bond?

Pv = Face value/(1+ r)n


= P1,000/(1 + 0.015)4
PV = ₱942.18

c. What is the price of the bond?

B = I ₒ x [∑t=1 2n 1 (1+ r d 2 ) 2n ]
= 25 x [∑t=1 2n 1 ( 1+ 3% 2 ) 4 ] + 1,000 x [ 3% 2 1+ ½
= (25 x 3.8543) + (1,000 x 0.94)
= 96. 36 + 942.18
B ₒ = ₱1,038.54

2. Givenbelow areinformationfor anexisting bondthatprovides annual couponpayments:


• Par value ofP1,000;
05 Task Performance 2 *Property of STI
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BM2004

• The coupon rate of 11%;


• Maturity of four (4) years; and
• The required rate of return by investors is 11%.

a. What is the present value of thebond?

Pv-bond = Coupon payment * [1 - (1 + r)-n]/r + Face value/(1+ r)nACP = P1,000 * 11% =


P110

r = 11% = 0.11
n = 4 years

Present Bond = P110 * [1 - (1 + 0.11)-4]/0.11 + P1,000/(1+ 0.11)4yrs


= P341.27 + P658.73

Pv = P1,000

b. What is the present value of the face value of the bond?


r = 14% = 0.14
Pv = P110* [1 - (1 + 0.14)-4]/0.14 + P1,000/(1+ 0.14)4
= P320.51 + P592.08

Pv = P912.59

c. What is the price of the bond?

r = 9% = 0.09
Pv = P110 * [1 - (1 + 0.09)-4]/0.09 + P1,000/(1+ 0.09)4
= P356.37 + P708.43

Pv = P1,064.80

05 Task Performance 2 *Property of STI


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BM2004

05 Task Performance 2 *Property of STI


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