Practice Problems

AEC 23 Financial Markets

Bond Valuation

1. The bond has a face value of ₱1,000,000. The bond pays interest of 5% every year. The bond
matures in 5 years. The prevailing market rate is 6%.

How much is the present value of the bond?

Present value of face value:

1,000,000 1,000,000
= = 747,258.17
(1 + 0.06)5 1.338226

Present value of interest payments:

Face value ₱1,000,000
Multiply: nominal interest rate 5%
Annual interest payment ₱50,000

1 − (1 + 𝑟)−𝑛
𝑃
𝑟
First, solve what is called the present value factor:

1 − (1 + 𝑟)−𝑛 1 − (1 + 0.06)−5 1 − 0.7472582 0.2527418

= = = = 4.212364
𝑟 0.06 0.06 0.06
Note:
1
(1 + 0.06)−5 =
(1 + 0.06)5

Second, multiply the PV Factor to the annuity payment:

Annual interest payment ₱50,000
Multiply: PV factor 4.212364
PV of interest payments ₱210,618.19

The value of the bond is:

PV of face value ₱747,258.17
PV of interest payments 210,618.19
Value of bonds ₱957,876.36

CVGCastro 1S 2022-2023
 When performing the computation, it is important not to do any rounding during the
computation. If that is unavoidable, make sure to round somewhere up to 6 decimal places to be
as accurate as possible.

2. The bonds have a face value of ₱1,000,000. They pay interest of 10% every year. The bond
matures in 10 years. The prevailing market rate is 12%. How much is the value of the bonds?

3. The bonds have a face value of ₱1,000,000. They pay interest of 10% every year. The bond
matures in 10 years. The prevailing market rate is 8%. How much is the value of the bonds?

4. The bonds have a face value of ₱5,000,000. They pay interest of 10% every year. The bond
matures in 5 years. The prevailing market rate is 12%. How much is the value of the bonds?

5. The bonds have a face value of ₱3,000,000. They pay interest of 6% every year. The bond
matures in 7 years. The prevailing market rate is 7%. How much is the value of the bonds?

6. The bonds have a face value of ₱5,000,000. They pay interest semi-annually of 10% every year.
The bond matures in 5 years. The prevailing market rate is 12%. How much is the value of the
bonds?

7. The bonds have a face value of ₱5,000,000 and have a term of 5 years. The bonds contain a
sinking fund provision, where the issuer must pay ₱1,000,000 worth of bonds each year. Interest
is paid at 10% annually. The prevailing market rate is 12%. How much is the value of the bonds?

CVGCastro 1S 2022-2023