MATURITY

a specific date on which the bond issuer returns the par value to the
bondholder and will redeem the bond.

TERM - is the number of years to maturity.

TYPES OF MATURITY

1. Short-Term Maturity - refers to a financial instrument or investment that has

a relatively short duration (1 year or less) until its maturity or expiration date.

2. Medium-Term Maturity - has a duration of (more than 1 year up to 10 years)

until its maturity or expiration date.

3. Long-Term Maturity - typically has a duration of more than 10 years.

COUPON
This is the fixed interest rate that a bond pays out periodically, typically
semi-annually, until it matures. Higher coupons offer higher current income but may
not be as attractive if interest rates rise in the future.

How is the coupon calculated?

The coupon is expressed as a percentage of the bond's face value.

Example: if a bond has a face value of P1,000 and a coupon rate of 5%, the
bondholder would receive P50 in interest payments every six months.

Impact of coupon rate on investors:

● Higher Income
● Price Sensitivity
● Investment Strategy

CURRENT YIELD
measures the annual return on the bond based solely on interest payments. It
does not account for capital gains or losses and also represents the bond's coupon
payments as a percentage of the bond price.

Current yield is calculated by a simple formula:

Annual peso coupon interest / Current Price
Example: Suppose a bond was issued with a par value of P100,000 and a 6% coupon.
Interest rates have fallen, and the bond now trades at P105,000. The current yield is:
P6,000 / P105,000 = 5.71%

Discussion Exercise: A 5-year corporate bond has a par value of P1,000, pays a 5%
annual coupon, and is currently trading at P950. What is the CY for the bond?
Sol’n: Annual peso coupon interest = P1,000 x 5% = P50
Current yield = Annual peso coupon interest / Current Price
= P50 / P950
= 5.26%

YIELD TO MATURITY

This is the annual rate the bondholder will receive if the bond is held to
maturity. Unlike current yield, yield to maturity includes the value of any capital gain
or loss the bondholder will enjoy when the bond is redeemed. This is the most widely
used figure for comparing returns on different bonds.

How is the yield to maturity calculated?

Calculating YTM is slightly complex.

Wherein:

Annual Coupon Payment (C)- determined by the coupon rate of the bond, or “interest
rate”

Face Value (FV) → The face value of a bond

Present Value (PV) → The present value (PV) of the bond refers to the current
market price and how much investors are willing to pay for the bond
Number of Compounding Periods (n) → The number of compounding periods refers
to the number of payments made in one year multiplied by the number of years to
maturity

Example:
Face Value of Bond (FV) P1,000
Annual Coupon Rate (%) 6%
Semi-annual coupon rate (%) 3%
Number of years to maturity 10 years
Number of compounding periods (n) 20
Present Value of Bond (PV) P1,050
Semi-annual coupon (C) P30

Solution:
𝐹𝑉 − 𝑃𝑉
𝑐+ 𝑛
𝑌𝑇𝑀 = 𝐹𝑉 + 𝑃𝑉
2

1,000 − 1,050
30+ 20
𝑌𝑇𝑀 = 1,000 + 1,050
2
27.5
= 1,025
= 0. 0268 𝑜𝑟 2. 7% semi-annually
2. 7% 𝑥 2 = 5. 4% annually

Impact of Yield to Maturity

● Comparing bonds
● Evaluating risk-reward
● Making informed decisions

DURATION
number expressing how quickly the investor will receive half of the total
payment due over the bond’s remaining life, with an adjustment for the fact that
payments in the distant future are worth less (less purchasing power) than payments
due soon.
This complicated concept can be grasped by looking at two extreme examples.
a. A ten-year zero-coupon bond offers payments only at maturity, so its duration is
precisely equal to its term (since there are no annual interest payments).

b. A hypothetical ten-year bond yielding 100% annually lets the owner collect a great
deal of money in the early years of ownership making its duration much shorter than
its term.
In the two examples above with identical terms of 10 years, the second one with the
higher yield has the shorter duration, because the holder is receiving more money
sooner. Traders and investors pay close attention to duration, as it is the most basic
measure of a bond’s riskiness. The longer the duration, the more the price of the
bond is likely to fluctuate before maturity.

Suppose a 5-year bond has:

● Face value of P1,000
● Coupon rate of 5%
● Annual coupon payments
● Current yield of 6%

The bond's cash flows for each year would be P50 for the first 4 years, and P1,050
(including the principal repayment of P1,000) in the 5th year.

Discounted at 6% yield, the present values of cash flows are:

● Year 1: P50 / 1.06^1 = P47.17
● Year 2: P50 / 1.06^2 = P44.54
● Year 3: P50 / 1.06^3 = P42.07
● Year 4: P50 / 1.06^4 = P39.73
● Year 5: P1050 / 1.06^5 = P747.94
Time-weighted cash flows:
● Year 1: 1 * P47.17 = P47.17
● Year 2: 2 * P44.54 = P89.08
● Year 3: 3 * P42.07 = P126.21
● Year 4: 4 * P39.73 = P158.92
● Year 5: 5 * P747.94 = P3,739.70

Total time-weighted cash flows = P4160.08 ; Total cash flows = P921.45

Duration = P4160.08 / P921.45 = 4.51 years
So the duration of this 5-year bond is 4.51 years when cash flows are discounted at
the current yield of 6%.

RATING OF RISK
A bond rating is a letter-based grading assigned by credit rating agencies like
Moody's, Standard & Poor's, and Fitch. It reflects the agency's opinion on the
creditworthiness of the issuer and their ability to make timely interest and principal
payments on the bond. Higher ratings indicate lower risk of default, while lower
ratings signify a higher degree of risk.
 Description of Bond Ratings by Rating Agencies
Moody's Standard & Fitch Ratings
Poor's

Highest credit quality; issuer has Aaa AAA AAA

strong ability to meet obligations

Very high credit quality; low risk Aa1 AA+ AA

of default Aa2 AA
Aa3 AA-

High credit quality, but more A1 A+

vulnerable to changes in A2 A A
economy or business A3 A-

Adequate credit quality for now, Baa1 BBB+

but more likely to be impaired if Baa2 BBB BBB
conditions worsen Baa3 BBB-

Below investment grade, but Ba1 BB+

good chance that issuer can Ba2 BB BB
meet commitments Ba3 BB-

Significant credit risk, but issuer B1 B+

is presently able to meet B2 B B
obligations B3 B-

Caa1 CCC+ CCC

High default risk Caa2 CCC CC
Caa3 CCC- C

Issuer failed to meet scheduled C D D

interest or principal payments

Impact of ratings on investors

● Assessing risk
● Making investment decisions
● Pricing

INTERPRETING THE PRICE OF A BOND

The price of a bond is normally quoted as a percentage of the price at the time the
bond was issued, which is usually reported as 100.

Bond prices are quoted to the second decimal place. Thus a bond trading at 94.75%
of its issue price will be quoted at 94.75. Therefore, a bond purchased for P100,000
when issued is currently worth P94,750.
INTEREST RATES AND BOND PRICES

Interest-rate changes within the economy are the single most important factor
affecting bond prices. This is because investors can profit from interest-rate
arbitrage.

Formula:
Price change = duration x value x change in yield

Example:
Assume that an investor has just paid P1 million for a bond priced at 100, with a 6%
coupon and a term of ten years to maturity. This bond might initially have a duration
of 7.66 years. If interest rates for ten-year borrowings suddenly fall, investors will
flock to the bond with a 6% coupon and bid up the price.

Suppose that the market rate for ten-year borrowings drops to 5.8% immediately
after the bond is issued.

The price change can then be calculated as:

Price change = 7.66 x P1,000,000 x (0.060 – 0.058) = P15,320.00

Market value= 1, 015, 320

Price= 101.53

INTERNATIONAL MARKETS

The issuance of bonds outside the issuer’s home country can occur in two ways:

● FOREIGN BONDS
○ are bonds issued outside the issuer’s home country, in which the bonds
are underwritten by an investment bank and are denominated in the
country where they are issued.
○ The bonds can have a floating-rate coupon or a fixed-rate coupon and
they have the same maturities as the purely domestic bonds with which
they must compete for funds.
○ Risk associated in investing in foreign bonds:
■ They typically have higher yields than the domestic bonds
■ They carry interest rate risk (↑ interest rate, market price / resale
value ↓)
■ Inflation risk
 ■ Currency risk (ex: income from bond yielding 7% in a european
currency is turned into dollars , the exchange rate may,
decrease the yield to 2% because of exchange rate difference)
■ Political risk
■ Repayment risk

● EUROBONDS
○ are denominated in neither the currency of the issuer’s home country
nor that of the country of issue, and are generally subject to less
regulation.
○ an international bond underwritten by an international syndicate of
banks and sold to investors in countries other than the one in whose
money unit the bond is denominated.
○ These bonds are usually issued in a bearer form, meaning that the
investors identity is not registered and thus is not known; or the name
and details of the investor is not indicated in the bond certificate, the
person who holds or possesses the certificate is the owner of the
bonds.
○ Interest is claimed through a coupon which is presented for payment at
one of the designated payor banks.
○ Eurobonds can be issued with floating-coupon rate (medium/long-term
maturities) depending on the preferences of the issuer.
○ Risks Associated With Eurobonds:
■ Exchange Rate Risk
■ Interest Rate Risk
■ Credit Risk
■ Liquidity Risk
■ Legal and Regulatory Risk
 Saint Paul School of Professional Studies
Palo, Leyte

The Bond
Market
(FINMARK- 282)

SUBMITTED BY:

ROXANNE CABIDO
SHAIRA CINCO
MA. NIÑA CAMILLE RAMIREZ
NICOLE SHAINE TORREMOCHA

SUBMITTED TO:

KRIZ MAE ELOISE ABELLAR