CHARLES JOHN B.

DOL MANAGEMENT OF INVESTMENTS-PREFINALS

1. PROBLEM 1: BICOL Corporation issued 2,000 of 6 year, 10% Ps 40,000
bonds as of January 1, 2016. How much is the bond value if the investor
desires a yield of:
a. 9%
b. 10%
c. 11%

A. BOND VALUE

● At 9% yield

= 4,000[1-1/(1.09)​6​/0.09] + 40,000[1/(1.09)​6​]
= 4,000(4.48591859) + 40,000(0.596267326)
=17,943.67436 + 23,850.69308
= ​41,794.38

● At 10% yield

= 4,000[1-1/(1.1)​6​/0.1] + 40,000[1/(1.1)​6​]
= 4,000(4.355260699) + 40,000(0.56447393)
= 17,421.0428 + 22,578.9572
= 40,000

● At 11% yield

= 4,000[1-1/(1.11)​6​/0.11] + 40,000[1/(1.11)​6​]
= 4,000(4.230537854) + 40,000(0.534640836)
= 16,922.15141 + 21,385.63344
= 38,307.78

B. APPROXIMATION YIELD
● 9%

AY = ​Interest per annum+[principal-value]/n

(principal+value)/2
= ​4,000+[40,000-41,794.38]/6
(40,000+41,794.38)/2
= ​3,700.936667
40,897.19
​= 9.05%
● 10%

AY = ​Interest per annum+[principal-value]/n

(principal+value)/2
= ​4,000+[40,000-40,000]/6
(40,000+40,000)/2
= ​4,000
40,000
​= 10%

● 11%

AY = ​Interest per annum+[principal-value]/n

(principal+value)/2
= ​4,000+[40,000-38,307.78]/6
(40,000+38,307.78)/2
= ​4,282.036667
39,153.89
​= 10.94%

PROBLEM 2: ABC Corporation issued 2000 of 5 year, 8% Ps 60,000

bongs as of January 1, 2017. How much is the bond value if the investor
desires a yield of :
a. 6.5%
b. 7%
c. 10%

A. BOND VALUE

● At 6.5% yield

= 4,800[1-1/(1.065)​5​/0.065] + 60,000[1/(1.065)​5​]
= 4,800(4.155679438) + 60,000(0.729880836)
=19,947.2613+ 43,792.85019
= ​63,740.11

● At 7% yield

= 4,800[1-1/(1.07)​5​/0.07] + 60,000[1/(1.07)​5​]
= 4,800(4.100197436) + 60,000(0.712986179)
= 19,680.94769+ 42,779.17077
= 62,460.12
● At 10% yield

= 4,800[1-1/(1.1)​5​/0.1] + 60,000[1/(1.1)​5​]
= 4,800(3.790786769) + 60,000(0.620921323)
= 18,195.77649 + 37,255.27938
= 55,451.06

B. APPROXIMATION YIELD

● 6.5%

AY = ​Interest per annum+[principal-value]/n

(principal+value)/2
= ​4,800+[60,000-63,740.11]/5
(60,000+63,740.11)/2
= ​4,051.978
61,870.055
​= 6.55%

● 7%

AY = ​Interest per annum+[principal-value]/n

(principal+value)/2
= ​4,800+[60,000-62,460.12]/5
(60,000+62,460.12)/2
= ​4,307.976
61,230.06
​= 7.04%

● 10%

AY = ​Interest per annum+[principal-value]/n

(principal+value)/2
= ​4,800+[60,000-55,451.06]/5
(60,000+55,451.06)/2
= ​5,709.788
57,725.53
​= 9.89%
 PROBLEM 3: BOLA Corporation issued 2,000 of 4 year, 7% Ps 70,000
bonds as of January 1, 2018. How much is the bond value if the investor
desires a yield of:
a. 6%
b. 7%
c. 8%

A. BOND VALUE

● At 6% yield

= 4,900[1-1/(1.06)​4​/0.06] + 70,000[1/(1.06)​4​]
= 4,900(3.465105613) + 70,000(0.792093663)
=16,979.0175 + 55,446.55643
= ​72,425.57

● At 7% yield

= 4,900[1-1/(1.07)​4​/0.07] + 70,000[1/(1.07)​4​]
= 4,900(3.387211256) + 70,000(0.762895212)
= 16,597.33516 + 53,402.66484
= 70,000

● At 8% yield

= 4,900[1-1/(1.08)​4​/0.08] + 70,000[1/(1.08)​4​]
= 4,900(3.31212684) + 70,000(0.735029852)
= 16,229.42152 + 51,452.0897
= 67,681.51

B. APPROXIMATION YIELD

● 6%

AY = ​Interest per annum+[principal-value]/n

(principal+value)/2
= ​4,900+[70,000-72,425.57]/4
(70,000+72,425.57)/2
= ​4,293.6075
 71,212.785
​ 6.03%
=

● 7%

AY = ​Interest per annum+[principal-value]/n

(principal+value)/2
= ​4,900+[70,000-70,000]/4
(70,000+70,000)/2
= ​4,900
70,000
​= 7%

● 8%

AY = ​Interest per annum+[principal-value]/n

(principal+value)/2
= ​4,900+[70,000-67,681.51]/4
(70,000+67,681.51)/2
= ​5,479.6225
68,840.755
​= 7.96%

2. Bonds are important in the financial market because it serves as key source of
capital for the corporate world. According to GraduateTutor.com, a bond is a debt
instrument that provides a periodic stream of interest payments to investors while
repaying the capital sum on a specified maturity date. A bond’s terms and
conditions are contained in a legal contract between buyer and the seller.

There are characteristics of bonds such as face value, coupon rate, coupon, and
maturity. Face Value or Par Value is the price at which the bond is sold to
investors when first issued. Coupon rate is computed as a fixed percentage of
the bond’s face value. Coupon is the dollar value of the periodic interest payment
promised to bondholders; this equals the coupon rate times the face value of the
bond. Maturity is the length of time until the principal is schedule to be repaid.
In case the bond value is greater than the face value, the bond value is classified
as at premium. If it is lower than the face value, it is categorized as discounted
and if the value is neutral, the bond value is at par.

Bond Valuation is vital because it helps investors figure out what rate of return
would make a bond investment worth the cost.