Bond Valuation

Abellana | Arzadon | Base | Calderon | Igot | Nollora |

Omela

Bonds are classified

according to:

1. Issuer

- nature of origin

(Corporate, Municipal and Foreign Bonds)

2. Security - collateral
a. unsecured no specific cost
a. 1.) government
a. 2.) corporate
- debentures signature only
- subordinated debentures 2nd

b. secured
a. 1.) government
- revenue bond fees from infrastructure
ojects are used
- assessment bond fees from projects that
enefit a group are used

a. 2.) corporation
- mortgage land & bldgs. are used
- collateral trust bond securities are used
- Eqpt Trust Certificates physical assests
are used

3. Term - original life

short-term 1 yr or less
intermediate 2 yrs to 10 yrs
long-term more than 10 yrs
4. Convertibility
a. convertible exchanged for securities
b. exchangeable exchanged for shares in a
different firm

5. Terms of Payment - mode of

payment
a. sinking fund setting aside
b. serial bond series of maturity dates
c. balloon loan partial amortization
d. income bond if interest is earned

6. Bond Cash Flows - structure of cash

flows
a. Annuities or Regular fixed interest
rate
and principal at maturity
b. Zero-coupon bond no interest and
principal at maturity
c. Variable rate adjustable rate
d. Consols interest is paid forever

7. Registration - recording of bond

ownership
a. bearer bond/coupon bond
bondholders
name is not printed
b. registered bond bondholders name
is
printed
c. book entry ownership recorded in
the
accounting books only

DFA 5/10

DF

0 7.7217

0.6139

1 7.1078

i = 10%
Value
INT

Present
PV
(1.0M)

Vb

Cap
Gains(/Lo
ss)

772, 170

613, 900

1,386,070

0.6446

710, 780

644, 600

1,355,380

(30, 690)

2 6.4632

0.6768

646, 320

676, 800

1,323,120

(32, 260)

3 5.7864

0.7107

578, 640

710, 700

1,289,340

(33, 780)

4 5.0757

0.7462

507, 570

746, 200

1,253,770

(35, 570)

5 4.3295

0.7835

432, 950

783, 500

1,216,450

(37, 320)

6 3.5460

0.8227

354, 600

822, 700

1,177,300

(39, 150)

7 2.7232

0.8638

272, 320

863, 800

1,136,120

(41, 180)

8 1.8594

0.9070

185, 940

907, 000

1,092,940

(43, 180)

9 0.9524

0.9524

95, 240

952, 400

1,047,640

(45, 300)

10 ____

1.0000

1,000,000

1,000,000

(47, 640)

Total
Returns
Yield

= Interest Yield + Cap Gains

1 0.050004 = or
or 5%
= .072146 .022142
2 0.049979 = or
or 5%
= .073780 .023801
3 0.050048 = or
or 5%
= .075579 .025531

Present Value
i=10%
INT
M
(1.0M)

DFA15,10

DF15,10

0 5.0188

0.2472

501,880

247,200

749,080

1
4.7716

0.2843

477,160

284,300

761,460

12,380

2 4.4873

0.3269

448,730

326,900

775,630

14,170

3 4.1604

0.3759

416,040

375,900

791,940

16,310

4 3.7845

0.4323

378,450

432,300

810,750

18,810

5 3.3522

0.4972

335,220

497,200

832,420

21,670

6 2.8550

0.5718

285,500

571,800

857,300

24,880

7 2.2832

0.6575

228,320

657,500

885,820

28,520

8 1.6257

0.7561

162,570

756,100

918,670

32,850

9 0.8696

0.8696

86,960

869,600

956,560

37,890

10
0.0000

1.0000

1,000,000

1,000,000

43,440

Vb

Cap
Gains

Total
Returns
Yield

= Interest Yield + Cap Gains

or Total Yields

1 0.15 = or
or 15% = 0.1335 0.0165
2 0.1499 = or
or 15% = 0.1313 0.0186
3 0.1499 = or
or 15% = 0.1289 0.0210

ISSUERS POINT-OF-VIEW
Amortization of Bond Premium
Vb,
beg

Amort.

386,070

0 1M
1

Premium,
bal.

38,607

347,463

Amortization of Bond Discount

Vb,
end

Vb,
beg

1,386,0
70

1,000,0
00

1,347,46
3

38,
607

308,856

1,308,85
6

38,
607

270,249

1,270,24
9

4
Jan 01

1,231,64
231,642
2
Cash
1,386,070
B/Pay
1,000,000
Premium on B.
386,070
5
1,193,03
193,035
#
5
31 Premium on B.
38,607
Amorization
38,607
6
1,154,42
154,428
Dec 31
#
8
Jan 31
Interest Exp
100,000
Cash
100,000
7
1,115,82
115,821
Maturity
payment of INT 1

Amort.

25,
092
25,092
25,092

Discount
bal.

Vb,
end

250,920

749,080

225,828

774,172

200,736

799,264

175,644

824,356

150,552

849,448

125,460

874,540

Cash
749,080
100,368 250,920
899,632
Disct on B.
B/Pay
1,000,000
75,276
924,724
#
Amortization
25,092949,816
50,184
Disct on B.
25,092
#
25,092
974,908
Interest Exp
100,000
Cash
100,000
-01,000,00

I. Three Methods of Extinction of Bonded

Indebtedness
A. Redemption
B. Conversion
C. Refunding
II. A. Redemption, defined
final settlement that terminates the liability
of the issuing company
B. Redemption before maturity
1. mandatory stipulated redemption
2. solicitation offered by issuing corp.

C. Why redeem before maturity?

1. reduce fixed charges
2. get rid of cumbersome bonded
indebtedness
3. improve credit standing
4. part of a refinancing scheme
III. A. Conversion, defined
the exchange of bonds for other securities
of the
company, usually stocks
B. Why allow conversion?
1. promote bonds marketability
2. reduce cost of financing

C. Conversion Ratio, defined

ratio at which the bonds maybe exchanged
for stocks expressed in terms of the number
of
shares or in monetary value
Example:
The 8% convertible bonds of NMI provide two
conversion ratios. For the first 3 years, 50
shares of common stocks (at 10 par value)
are given for every bond of 1,000 par value.
If the conversion right is exercised after the
3rd year of issue, the exchange ration is 40
common shares for every bond.

D. Conversion Period, defined

the stipulated time at which bonds are
exchanged
for other securities
E. Disadvantages of Conversion
(Issuing Corps Point-of-view)
1. maintain reserve of unissued stocks
2. mgt. control may be jeopardized
(Bondholders Point-of-view)
1. possibility of dilution
2. bonds will have a poor market

IV. A. Refunding, defined

process of replacing bonds of previous
with bonds of a new issue

issue

B. Why refund before maturity?

1. consolidate several old issues into one new
issue for easier management and servicing
2. remove cumbersome conditions
3. raise additional capital
C. Why refund at maturity?
1. shortage of funds redeem
2. may cripple business operation due to
depletion of working capital
3. divert funds for capital expenditure