Beruflich Dokumente
Kultur Dokumente
Characteristics of Bonds
A. Common Characteristics
Maturity Date – January 31, 2032
Face Value – 1000
Coupon Interest Rate – 6%
Coupon Payment – 60
Example: CBM Corporation issued a 20 year, ₱1000 bond with a stated rate of 6% on January 31, 2012
B. Other Characteristics
1. Issued with Call Provision (Callable Bond)
– gives rights or privilege to the issuer to redeem the bond at a certain call price prior to its maturity
– normally attached to a corporate bond but not to a treasury bond.
Now let's suppose that later that year, interest rates in general go up. If new bonds that cost $1,000 are paying
an 8% coupon—or $80 a year in interest—buyers will be reluctant to pay the $1,000 face value for your 7%
ABC Company bond. In order to sell, you'd have to offer your bond at a lower price—a discount—that would
enable it to generate approximately 8% to the new owner. In this case, that would mean a price of about
$875.1
What if market interest rates fall?
Similarly, if rates dropped to below your original coupon rate of 7%, your bond would be worth more than
$1,000. It would be priced at a premium, since it would be carrying a higher interest rate than what was
currently available on the market.
So in the event that the market interest rate significantly declines, it is more advantageous or cost-wise for the
issuer (debtor) to call the old bonds and replace them by new bonds at a lower interest rate.
2. Discount Rate (effective interest rate; required rate of return which is the min. acceptable rate for an
investor)
– used to compute the present value factors
CLASSIFICATION OF BONDS
Nonzero Coupon Bond – offers a stream of coupon interest payments during the life of the bond
Zero Coupon Bond – does not pay any interest at all
FORMULAS
Present Value of 1 = (1 + 𝑖) −𝑛
1 − (1 + 𝑖) −𝑛
Present Value of an ordinary annuity of 1 =
i
Callable Bond
CP + [(Call Price − Bond Price)/t]
YTC =
Bond Price (0.6) + Call Price (0.4)
CP BPn − BPo
ETR = +
BPo BPo
ILLUSTRATIVE PROBLEMS
What is the value of a fifteen-year (15), ₱1000 corporate bond with a stated rate of 10% per annum?
Assume that:
A. The bond of similar quality yields 10% rate.
B. The bond of similar quality yields 8% rate.
C. The bond of similar quality yields 12% rate.
A. 8%
B. 9%
A ₱1000 ABCD Corporate bond was issued on January 1, 2018 with annual coupon interest rate of 8%. The
current market value of the bond is ₱935.82 and it matures in 10 years. Determine the discount rate or the
yield to maturity.
Assume that a 10-year callable bond has 12% coupon interest rate upon issuance and assume that it was
issued at ₱1000 par value. This bond is with call protection period of 4 years from issuance, meaning, the
issuer cannot call the bond from the issue date (year 0) until the end of fourth year (year 4). In the beginning
of year 5, the market interest rate falls from 12% to 10%. The call premium is 5%.
CBA Corporation has bonds outstanding with ₱1000 face value and 10 years left until maturity. They have 12
annual coupon payments, and the current market value is ₱1120. These bonds can be called starting 5 years at
105% of the face value.
1. Determine the Yield to Maturity assuming the Corporation did not exercise its right to call.
2. Determine the Yield to Call assuming the Corporation call.
AMV purchased on January 1, 2017 a ₱1000 face value bond issued by CBM Corporation with 9% annual
coupon interest and 10 years to maturity for ₱950. If AMV sold the bond on January 1, 2018 for ₱970 to Wash
Sy Gorres, what is the total rate of return earned by AMV on the investment?