GENERAL FEATURES

OF BONDS
WHY INVEST IN
BONDS?
 • BONDHOLDERS RECEIVE
 INTEREST DURING THE LIFE OF THE BOND
 PRINCIPAL IS RETURNED WHEN BOND IS REDEEMED
WHY  POTENTIAL OF CAPITAL GAIN OR CAPITAL LOSS
 SOME BONDS OFFER TAX ADVANTAGES
INVEST IN  SOME BONDS CAN BE CONVERTED INTO STOCKS

BONDS? • BONDHOLDERS ARE FIRST IN LINE FOR REPAYMENT IF

THERE IS DEFAULT ON THE LOANS
• BOND PRICES ARE FAR LESS VOLATILE THAN STOCKS
• AVERAGE RETURNS OVER DECADES – 4% TO 8%
 TRADITIONAL
• Mortgage Bonds
• Debentures
• Subordinated
debentures
COMMON TYPES • Income bonds

OF BONDS
CONTEMPORARY
• Zero- (low-) coupon bonds
• Junk bonds
• Floating-rate bonds
• Extendible notes
• Puttable bonds
 EUROBOND
A bond issued by an international
borrower and sold to investors in
countries other than the currency in
which the bond is denominated.

INTERNATIONAL
BOND ISSUES
FOREIGN BOND
A bond that is issued by a foreign
corporation or government and is
denominated in the investor’s
home currency and sold in the
investor’s home market.
BONDS INDENTURE

COUPON PAYMENT

FACE VALUE COUPON RATE

✓ Various standard and restrictive provisions

✓ Sinking-fund requirements and security
✓ Security interest provisions
BOND VALUE
BEHAVIOR
 BONDS AND INTEREST RATES
BY FAR, THE MOST MISUNDERSTOOD FEATURE ABOUT BONDS IS
THEIR INVERSE RELATIONSHIP WITH INTEREST RATES

• When interest rates fall, bond prices rise

• When interest rates rise, bond prices fall

When interest
rates fall, … bond prices rise

and vise-versa
 WHY WOULD A BOND
SELL AT A PREMIUM OR A
DISCOUNT?
 WHY WOULD A BOND SELL AT A
PREMIUM OR A DISCOUNT?

If the value of the bond is ₱1,000, will the bond always sell at ₱1,000?

NO, since the nominal/coupon rate of your bond doesn’t change, the price
of the bond changes to reflect the change in the prevailing interest rates
within the financial industry.

Remember the see-saw?

 WHY WOULD A BOND SELL AT A
PREMIUM OR A DISCOUNT?

EXAMPLE 1 – BOND PAYING 10%

 BOND’S FACE VALUE IS ₱1,000 • 10% OF ₱1,000 = ₱100
 BOND’S INTEREST PER YEAR IS ₱100

INTEREST RATES FALL TO 8%

 INVESTORS HAVE TO PAY ₱1,250 TO GET • 8% OF ₱1,250 = ₱100
THE SAME AMOUNT OF INTEREST

The result is your bond is now worth more than it was.

The bond could be sold at a high PREMIUM.

 WHY WOULD A BOND SELL AT A
PREMIUM OR A DISCOUNT?

EXAMPLE 2 – BOND PAYING 10%

 BOND’S FACE VALUE IS ₱1,000 • 10% OF ₱1,000 = ₱100
 BOND’S INTEREST PER YEAR IS ₱100

INTEREST RATES RISE TO 12%

 INVESTORS NEED ONLY PAY ₱833.33 TO
• 12% OF ₱833.33 = ₱100
GET THE SAME AMOUNT OF INTEREST

The result is your bond is now worth less than it was.

The bond could be sold at a large DISCOUNT.

 MATURITY DATE IS ALSO
VERY IMPORTANT

IN GENERAL, THE LONGER THE MATURITY, THE GREATER THE PREMIUM OR DISCOUNT

Just like a see-saw, the farther out you are, the greater the rise or fall. This is
why long-term bonds are riskier than short-term bonds.

Higher
Interest Rate

2 yr.
10 yr.
30 yr.

Longer Maturity
 BOND PAR
MARKET VALUE = PREMIUM
VALUE

BOND
BOND VALUE MARKET = PAR = AT PAR
VALUE
BEHAVIOR VALUE

BOND
PAR = DISCOUNT
MARKET
VALUE
VALUE
 BOND
VALUATION
 SAMPLE PROBLEM:
On January 1, 2021, XYZ Company issued 10-year 1,000 par value
bond at a stated rate of 10%. At this time, the market is selling these
bonds at 12%. Interest is paid semi-annually starting June 30, 2021.

B˳ = bond’s value at time zero n = number of years to maturity rd = effective interest rate
I = Annual interest payments M = par value (payment to t = number of periods
maturity)
5 SIMPLE STEPS FOR
BOND VALUATION
(SEMIANNUAL INTEREST)
 January 1, 2021
Price of Bond = PV of Bond
1,000 par value, 10-year bond,
(Step 4) + PV of interest
payments (Step 3) nominal rate = 10%,
effective interest rate = 12%
(paid starting June 30,2021)
1. Convert interest rates & Step 1)
repayment period. Nominal Interest Rate = 10% / 2 = 5%
Effective Interest Rate = 12% / 2 = 6%
2. Calculate Interest Paid 10 year period x 2 = 20 periods
3. Calculate PV of Interest Step 2)
Payments (Annuity) Nominal Interest Rate 5% * Face Value 1,000 = 50
4. Calculate present value of Step 3)
bond (Lump sum) 50 * 11.46992 = 573.50 1.06 ÷÷ = (20x) – 1 ÷ 0.06
Step 4) (Ordinary Annuity)
5. Calculate Bond’s Price 1,000 * 0.31180 = 311.80 1.06 ÷÷ = (20x)
Step 5) (PV of 1)
**PV of an Ordinary Annuity of 1
573.50 + 311.80 = 885.30
at 6% for 20 periods

**PV of 1 at 6% for 20 periods

 SAMPLE PROBLEM:
On January 1, 2021, XYZ Company issued 10-year 1,000 par value
bond at a stated rate of 10%. At this time, the market is selling these
bonds at 12%. Interest is paid semi-annually starting June 30, 2021.

B˳ = bond’s value at time zero n = number of years to maturity rd = discounted rate

I = Annual interest payments M = par value (payment to t = number of periods
maturity)
THANK YOU AND
GOD BLESS!
 0 1st 2nd 3rd
Ordinary
Annuity No payment payment payment
payment

0 1st 2nd 3rd

Annuity Due
No
payment payment payment
payment