Topic Outline

BOND
VALUATION
Bonds
Bond
Valuation
Bond Valuation
Examples and
Exercises

❑ What is a Bond? ❑ Bond Valuation ❑ Bond Valuation

❑ Why Invest on a Definition Method
Reported by: Bond? ❑ Importance of ❑ Types of Bonds
Glenda E. Macatangay ❑ Why Companies/ Bond Valuation ❑ Bond Prices
Ron Jayson R. Cruz Government issue ❑ Illustrative
Bond? Examples
❑ Bond Risks (Computations)
 WHAT IS A BOND?
COMPANY/
GOVERNMENT

01
INVESTORS
 WHY INVEST ON A BOND?
01
❑ Regularly scheduled payments
❑ Return of Invested Capital
❑ Bond offers Diversification.
WHY ISSUE A BOND?
❑ Raise money to fund it’s acquisition, to
research and develop a new product, enter a
new market and etc. without diluting the
current shareholders' equity.
❑ Corporations can borrow at a lower interest
rate and longer term than the rates and
terms available in banks.
 COMMON RISKS OF INVESTING IN BONDS
1. Credit Risk/Default Risk

01
 COMMON RISKS OF INVESTING IN BONDS
2. Interest Rate Risk
This is the risk that interest rates would go up and any bonds you
own would be worth less if sold before the maturity date.

01
Face Value P1,000.00
Bond Price P1,000.00 • Prevailing Interest
P1,000.00
Terms: 3 Years rate is 7%
@6% coupon rate • Sell Bond at a
@6% Interest rate discount P991.00

Day 0 Year 1 Year 2 Year 3 (Maturity)

 COMMON RISKS OF INVESTING IN BONDS
2. Interest Rate Risk

01
 What is BOND VALUATION?

Bond valuation is the process

02 of identifying the fair market
value of a particular bond.
 “The highest price, expressed in terms of
cash equivalents, at which property would
change hands between a hypothetical
willing and able buyer and a hypothetical
willing and able seller, acting at arm’s

02 length in an open and unrestricted

market, when neither is under compulsion
to buy or sell and when both have
reasonable knowledge of the relevant
facts.”

FAIR MARKET VALUE

 Finance Professionals
✓ To determine whether
to issue bond and
what coupon rate Investors

02
should be included in
✓ to determine an
the Bond to make it
accurate present
competitive.
value which can be
very helpful to make
an informed
investment decision.
BOND VALUATION
METHOD
1 Estimate the expected cash flows

03
Determine the appropriate interest rate that
2 should be used to discount the cash flows.

3 Calculate the present value of the expected

cash flows (step-1) using appropriate
interest rate (step- 2) i.e. discounting the
expected cash flows
BOND VALUATION
METHOD
1 Estimate the expected cash flows
➢Coupon Payments

03 ➢Principal Payment at Maturity

Day 0 Year 1 Year 2 Year 3 Year 4 Maturity

BOND VALUATION Present value
METHOD of the bond's Annuity
future
Interest
payments

03
Theoretical
Fair Value
of a Bond

Present Value
of the Face
Value of the Lump Sum
Bond
 Term and Serial Bonds

Registered and Bearer

Bonds
Zero-Coupon Bond
03
Others Types of
Bonds
Discounted cash flow
approach
C = future cash flows, that
is, coupon payments

r = discount rate, that is,

yield to maturity
F = face value of bond
t = number of periods
T = time to maturity
FORMULA
BOND VALUATION
Discounted cash flow
approach

FORMULA
BOND VALUATION
BOND PRICES
 Methods of Amortization

Straight Line Method – This method provides for an

equal amount of premium or discount amortization
each accounting period.

Bond Outstanding Method – This method is applicable

to serial bonds, whether acquired at a premium or
discount.

Effective Interest Method – Simply “interest method”

or scientific method.