I.

TYPES OF BONDS (5 points: 1 item x 5 points)

In no more than five (5) sentences, discuss one (1) classification of bonds and cite an
example of how it meets the requirements of the players in the financial system.
Answer:
A corporate bond is a debt asset issued by a company and sold to investors. The
corporation receives the funds it requires and agrees to pay the lender a certain amount of
interest, either at a fixed or variable rate. To suit the investors' needs, issuers must have
collateral or highly liquid treasury securities. For example, if a corporation invests in money
markets before issuing a bond, investors will likely find this appealing because the company
has a liquid asset that it may tap into in the event of an emergency.
II. YIELD TO MATURITY (10 points: 2 items x 5 points) Give what is asked in the problem.
Write your solutions in the space provided.

1. Christian Punzalan received an offer of a 10-year, 6% annual coupon, a P1,000 par

value bond at a price of P1,149.30. What is the rate that will make the future cash flow of
the bond equal to its current price?

Annual interest rate: I =V x Nominal Interest Rate I = P1,000 x 6% I = P60

Let: I = 60 V = P1,000 M = P1,149.30 n = 10
1000−1149.30
60+( )
10
YTM =
1000+ 1149.30
2
149.30
60−( )
10
¿
2149.30
2
60−14.93
¿
1074.65

45.07
¿
1074.65
¿ 4.19 %

2. Nikki Hilario plans to buy a 5-year, 12% annual coupon, P1,000 par value bond at a
price of P1,500. What is the rate that will make the future cash flow of the bond equal to
its current price?
I= 1000 x 12% = 120
V= 1000
M= 1500
n= 5
 1000−1500
120+( )
5
YTM =
1000+ 1500
2
500
120−( )
5
¿
2500
2

120−100
¿
1250

20
¿
1250
¿ 1.60 %