CHAPTER 6:

VALUATION OF BONDS
BONDS
Is a long term debt instrument issued by government agencies
or corporations to the public in order to raise needed funds.

It is a long term contract indicating that the holder of these

instruments will receive a fixed interest payment, known as
coupon payment, each year until its maturity date and also
receive a principal payment, known as face value, on the said
maturity date.
 CHARACTERISTICS OF BONDS:
A. COMMON CHARACTERISTICS:

 MATURITY DATE is the date specified on the bond.

 FACE VALUE is the amount borrowed by the issuer.
 COUPON PAYMENT is the amount of interest payment fixed each year until the maturity
of the bond.
Coupon Interest Rate X Face Value

 COUPON INTEREST RATE is the rate stated in the bond which is used for annual interest
payment calculation. It is also known as Stated Interest Rate or Nominal Interest Rate.
CHARACTERISTICS OF BONDS:
EXAMPLE:

CBM Corporation issued a 20 year,

₱1000 bond which stated rate is 6% on
January 31, 2012.
 CHARACTERISTICS OF BONDS:
B. OTHER CHARACTERISTICS:

1. ISSUED WITH CALL PROVISIONS

 Provision that gives rights or privilege to the issuer to redeem the bond at a
certain “call price” prior to its maturity

 Bond with call provision are referred to as callable bonds.

 CHARACTERISTICS OF BONDS:
B. OTHER CHARACTERISTICS:

2. ISSUED WITH PUT PROVISION

 A provision that give right or privilege to the bondholders to “put back” or

require the issuer to repurchase the said bond at a certain “put price” prior to
maturity.

 Bonds with the put provisions are called putable bonds.

 CHARACTERISTICS OF BONDS:
B. OTHER CHARACTERISTICS:

3. ISSUED WITH CONVERTIBLE FEATURES

 Gives the bondholders the right or option to convert the bond into number of
shares of a common stocks at a predetermined price.

 Bonds with the with such features are called convertible bonds.
 CHARACTERISTICS OF BONDS:
B. OTHER CHARACTERISTICS:

3. ISSUED WITH WARRANTS

 Gives the bondholders the right or option not convert the bond but an option to
buy shares of common stocks from a company at a predetermined price.
PARTIES IN THE ISSUANCE OF BONDS:
1.BONDHOLDERS
 Investor who extends loans to the company certain in amount of
money equivalent to the value of the bond issued.

Also known as lenders or creditors of the company.

PARTIES IN THE ISSUANCE OF BONDS:
2. ISSUERS
 It may either be the Government or a Corporation.
• Bonds issued by the government are generally referred to as
Treasury Bonds or Government Bonds.
• Bonds issued by the corporation are known as Corporate
Bonds
 VALUATION OF BONDS:
A. NONZERO COUPON BOND
 Offers a stream of coupon interest payment during the life of the
bond.
 The Value of this Bond is equal to the present value of cash flow from
interest or coupon payments and cash flow from the terminal or face
value which is the maturity value of the bond.
𝑪𝑷 𝑭𝑽
BV = +
(𝟏+𝑫)𝒕 (𝟏+𝑫)𝒏
NONZERO COUPON BOND:
EXAMPLE:
What is the value of a two year (2), ₱1000 corporate
bond with stated rate of 10% per annum?
Assume that:
A. The bond of similar quality yields 10% rate.
B. The bond of similar quality yields 8% rate.
C. The bond of similar quality yields 12% rate.
 VALUATION OF BONDS:
A. ZERO COUPON BOND
 T

 This bond has no coupon interest payment but are usually sold below
its face value or issued at a discount.

𝑭𝑽
BV =
(𝟏+𝑫)𝒏
ZERO COUPON BOND:
EXAMPLE:
Blue Blurry Corporation issued a zero coupon
bond with 15 years until maturity and a ₱1000 face
value. Determine the value of the bond if the
discount rate is 8%
 REQUIRED RATE OF RETURN:
A. YIELD TO MATURITY (YTM)

 Is the rate of returned earned by the bondholders who held the bond
until maturity.

𝑪𝑷+ 𝑭𝒂𝒄𝒆 𝑽𝒂𝒍𝒖𝒆 −𝑩𝒐𝒏𝒅 𝑽𝒂𝒍𝒖𝒆 /𝒕

YTM =
𝑩𝒐𝒏𝒅 𝑽𝒂𝒍𝒖𝒆 𝟎.𝟔 +𝑭𝒂𝒄𝒆 𝑽𝒂𝒍𝒖𝒆 (𝟎.𝟒)
 REQUIRED RATE OF RETURN:
A. YIELD TO CALL (YTC)

 Is the rate of returned earned by the bondholders, if the issuer

exercised its right to call when interest rate fall.

𝑪𝑷+ 𝑪𝒂𝒍𝒍 𝑷𝒓𝒊𝒄𝒆 −𝑩𝒐𝒏𝒅 𝑷𝒓𝒊𝒄𝒆 /𝒏

YTC =
𝑩𝒐𝒏𝒅 𝑷𝒓𝒊𝒄𝒆 𝟎.𝟔 + 𝑪𝒂𝒍𝒍 𝑷𝒓𝒊𝒄𝒆 (𝟎.𝟒)
 REQUIRED RATE OF RETURN:
EXAMPLE:
CBA Corporation has bonds outstanding with ₱1000 face value and 10
years left until maturity. They have 12 annual coupon payments, and the
current market value is ₱1120. These bonds can be called starting 5 years
at 105% of the face value.

1. Determine the Yield of Maturity, assuming the Corporation did not exercise its
rights to call.
2. Determine the Yield of Call, assuming the Corporation called in 5 years.
EXPECTED TOTAL RETURNS ON BONDS:
 Are the amount of cash inflow from interest payments, maturity value
(face value) and call price.

ETR = CY + CG/(L)Y
𝑪𝑷 𝑩𝑷𝒏 − 𝑩𝑷𝒐
ETR = +
𝑩𝑷𝒐 𝑩𝑷𝒐
EXPECTED TOTAL RETURNS ON BONDS:
EXAMPLE:
AMV purchased on January 1, 2017 a ₱1000 face value bond
issued by the CBM Corporation with 9% annual coupon interest
and 10 years to maturity for ₱950. If AMV sold the bond on
January 1, 2018 for ₱970 to Wash Sy Gorres, what is the total
rate of return earned by AMV on the investment?
 GROUP 5:

JAN VINCENT GAVINO

HANNAH DEXIE MACASAET
MARY MAE JOY PEREZ