Quiz - Bond Valuation

1. What is the price of a 15-year, zero coupon bonds paying P1,000 at maturity if the YTM is 5
percent?
𝑀𝑎𝑡𝑢𝑟𝑖𝑡𝑦 𝑣𝑎𝑙𝑢𝑒
𝐵0 =
(1 + 𝑟)𝑛
1,000
𝐵0 =
(1 + 0.05)15
1,000
𝐵0 =
2.079
𝐵0 = 481.017

2. Same requirement and data in no. 1, except that the YTM is 10%.
𝑀𝑎𝑡𝑢𝑟𝑖𝑡𝑦 𝑣𝑎𝑙𝑢𝑒
𝐵0 =
(1 + 𝑟)𝑛
1,000
𝐵0 =
(1 + 0.10)15
1,000
𝐵0 =
4.177
𝐵0 = 239.392

3. Same requirement and data in no. 1, except that the YTM is 15%.
𝑀𝑎𝑡𝑢𝑟𝑖𝑡𝑦 𝑣𝑎𝑙𝑢𝑒
𝐵0 =
(1 + 𝑟)𝑛
1,000
𝐵0 =
(1 + 0.15)15
1,000
𝐵0 =
8.137
𝐵0 = 122.894

4. Vera France has issued a bond with the following characteristics: Par: P1,000; Time to maturity:
15 years; Coupon rate: 7 percent; Semiannual payments. Calculate the price of the bond if the
YTM is 7 percent.
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 = 1,000 ∗ 7%
= 70
𝐼
1 𝑟𝑑
𝐵0 = 𝑟2 ∗ [1 − 𝑟 ] + 𝑀 ∗ 1/(1 + )𝑛∗2
𝑑
(1 + 𝑑 )𝑛∗2 2
2 2
70
1 7% 15∗2
𝐵0 = 2 ∗ [1 − ] + 1,000 ∗ 1/(1 + )
7% 7% 15∗2 2
2 (1 + 2 )
35 1
𝐵0 = ∗ [1 − ] + 1,000 ∗ 1/(1 + 3.5%)30
3.5% (1 + 3.5%)30
𝐵0 = (1,000 ∗ 0.644) + (1,000 ∗ 0.356)
𝐵0 = 643.72 + 356.28
 𝐵0 = 1,000

5. Same requirement and data in no. 4, except that the YTM is 9 percent.
𝐼
2 1 𝑟𝑑
𝐵0 = 𝑟 ∗ [1 − 𝑟 ] + 𝑀 ∗ 1/(1 + )𝑛∗2
𝑑
(1 + 2𝑑 )𝑛∗2 2
2
70
1 9% 15∗2
𝐵0 = 2 ∗ [1 − ] + 1,000 ∗ 1/(1 + )
9% 9% 15∗2 2
(1 + )
2 2
35 1
𝐵0 = ∗ [1 − ] + 1,000 ∗ 1/(1 + 4.5%)30
4.5% (1 + 4.5%)30
𝐵0 = (777.78 ∗ 0.733) + (1,000 ∗ 0.267)
𝐵0 = 570.11 + 267
𝐵0 = 837.11

6. Same requirement and data in no. 4, except that the YTM is 5 percent.
𝐼
2 1 𝑟𝑑
𝐵0 = 𝑟 ∗ [1 − 𝑟 ] + 𝑀 ∗ 1/(1 + )𝑛∗2
𝑑
(1 + 2𝑑 )𝑛∗2 2
2
70
1 5% 15∗2
𝐵0 = 2 ∗ [1 − ] + 1,000 ∗ 1/(1 + )
5% 5% 15∗2 2
(1 + )
2 2
35 1
𝐵0 = ∗ [1 − ] + 1,000 ∗ 1/(1 + 2.5%)30
2.5% (1 + 2.5%)30
𝐵0 = (1,400 ∗ 0.523) + (1,000 ∗ 0.477)
𝐵0 = 732.56 + 476.74
𝐵0 = 1,209.30

7. What can you say about the bond prices computed in nos. 4 to 6? Be direct to the point.
Bond prices rise if yield to maturity falls, therefore there is an indirect relationship between bond
prices and yield to maturity. Individually, the bonds:
At 7% sells at par value
At 9% sells at a discount
At 5% sells at a premium

8. If Tiffany decided to invest in the bonds issued by Vera France, with a desired rate of return of 7%
for this investment, how much should Tiffany pay Vera France?
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 = 1000 ∗ 7%
= 70
 𝐼 1
𝐵0 = ∗ [1 − ] + 𝑀 ∗ 1/(1 + 𝑟𝑑 )𝑛
𝑟𝑑 (1 + 𝑟𝑑 )𝑛
70 1 10
𝐵0 = ∗ [1 − 10 ] + 1,000 ∗ 1/(1 + 7%)
7% (1 + 7%)
𝐵0 = (1,000 ∗ 0.492) + (1,000 ∗ 0.508)
𝐵0 = 491.65 + 508.35
𝐵0 = 1,000

9. Jamaica Corp. issued 15-year bonds 2 years ago at a coupon rate of 6.4 percent. The bonds make
semiannual payments. If these bonds currently sell for 105 percent of par value, what is the
approximate YTM right now?
At 6.4%
𝐵𝑜𝑛𝑑 𝑝𝑟𝑖𝑐𝑒 = 1,000 + (1,000 ∗ 105%)
= 1,050
105
1 6.4 13∗2
1,050 = 2 ∗ [1 − ] + 1,000 ∗ 1/(1 + )
6.4% 6.4% 13∗2 2
(1 + )
2 2
52.50 1
1,050 = ∗ [1 − ] + 1,000 ∗ 1/(1 + 3.2)26
3.2% (1 + 3.2%)26
1,050 = (1,640.625 ∗ 0.559) + (1,000 ∗ 0.441)
1,050 = 917.294 + 440.888
1,050 < 1,358.181
There, the yield to maturity must be higher than 6.4%. Using excel and interpolation, I found
that the estimated yield to maturity of the bond is 9.802%.
105
2 1 9.802 13∗2
1,050 = ∗ [1 − ] + 1,000 ∗ 1/(1 + )
9.802% 9.802% 13∗2 2
2 (1 + 2 )
52.50 1
1,050 = ∗ [1 − ] + 1,000 ∗ 1/(1 + 4.90%)26
4.90% (1 + 4.90%)26
1,050 = (1,071.21 ∗ 0.711) + (1,000 ∗ 0.288)
1,050 = 762.46 + 288.22
1,050 = 1,050.68

10. Joshua Calil Corporation has bonds on the market with 11.5 years to maturity, a YTM of 7.6
percent, and a current price of P1,060. The bonds make semiannual payments. What must the
coupon rate be on these bonds?
Coupon rate must be higher than 7.6% and currently sells at 1,060. There the coupon rate must
be:
1
[1 − 𝑟 ]
𝑝𝑎𝑟 𝑣𝑎𝑙𝑢𝑒 (1 + 2𝑑 )𝑛∗2
𝐵0 = 𝑟 +𝐶∗ 𝑟𝑑
(1 + 2𝑑 )𝑛∗2 2
 1
[1 − 7.6% 11.5∗2 ]
1,000 (1 + )
1,060 = +𝐶∗ 2
7.6% 7.6%
(1 + 2 )11.5∗2 2
1
1,000 [1 − ]
(1 + 3.8%)23
1,060 = + 𝐶 ∗
(1 + 3.8%)23 3.8%
1,060 = 424.093 + 𝐶 ∗ 15.156
1,060 − 424.093 = 15.156𝐶
635.907 15.156𝐶
=
15.156 15.156
635.907 15.156𝐶
=
15.156 15.156
41.959 = 𝐶
𝐴𝑛𝑛𝑢𝑎𝑙 𝑐𝑜𝑢𝑝𝑜𝑛 𝑟𝑎𝑡𝑒 = 41.959 ∗ 2
= 83.918
𝐴𝑛𝑛𝑢𝑎𝑙 𝑐𝑜𝑢𝑝𝑜𝑛 𝑝𝑎𝑦𝑚𝑒𝑛𝑡
𝐶𝑜𝑢𝑝𝑜𝑛 𝑟𝑎𝑡𝑒 =
𝑝𝑎𝑟 𝑣𝑎𝑙𝑢𝑒
83.918
𝐶𝑜𝑢𝑝𝑜𝑛 𝑟𝑎𝑡𝑒 =
1,000
= 0.0839

11. Even though most corporate bonds in the Philippines make coupon payments semiannually,
bonds issued elsewhere often have annual coupon payments. Suppose Emily Grace Corporation
issues a bond with a par value of P1,000, 19 years to maturity, and a coupon rate of 4.5 percent
paid annually. If the yield to maturity is 3.9 percent, what is the current price of the bond?
𝐴𝑛𝑛𝑢𝑎𝑙 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 = 1,000 ∗ 4.5%
= 45
𝐼 1
𝐵0 = ∗ [1 − ] + 𝑀 ∗ 1/(1 + 𝑟𝑑 )𝑛
𝑟𝑑 (1 + 𝑟𝑑 )𝑛
45 1
𝐵0 = ∗ [1 − ] + 1,000 ∗ 1/(1 + 3.9%)19
3.9% (1 + 3.9%)19
𝐵0 = (1,153.846 ∗ 0.517) + (1,000 ∗ 0.483)
𝐵0 = 596.08 + 483.398
𝐵0 = 1,079.477

12. A Philippine company has a bond outstanding that sells for 92 percent of its P100,000 par value.
The bond has a coupon rate of 2.8 percent paid annually and matures in 21 years. What is the
exact yield to maturity of this bond?
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 = 1,000 ∗ 2.8%
= 28
𝑝𝑎𝑟 − 𝑝𝑟𝑖𝑐𝑒
𝐶𝐹 + 𝑡
𝐸𝑠𝑡. 𝑌𝑇𝑀 =
𝑝𝑎𝑟 + 𝑝𝑟𝑖𝑐𝑒
2
 100,000 − 92,000
28 + 21
𝐸𝑠𝑡. 𝑌𝑇𝑀 =
100,000 + 92,000
2
408.952
𝐸𝑠𝑡. 𝑌𝑇𝑀 =
96000
𝐸𝑠𝑡. 𝑌𝑇𝑀 = 0.00426
𝑈𝑠𝑖𝑛𝑔 𝑒𝑥𝑐𝑒𝑙 = 0.00427

13. Suppose the real rate is 2.4 percent and the inflation rate is 3.1 percent. What rate would you
expect to see on a Treasury bill?
𝑇𝑟𝑒𝑎𝑠𝑢𝑟𝑦 𝑏𝑖𝑙𝑙 𝑟𝑎𝑡𝑒 = 𝑅𝑒𝑎𝑙 𝑟𝑎𝑡𝑒 + 𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒
𝑇𝑟𝑒𝑎𝑠𝑢𝑟𝑦 𝑏𝑖𝑙𝑙 𝑟𝑎𝑡𝑒 = 2.4% + 3.1%
𝑇𝑟𝑒𝑎𝑠𝑢𝑟𝑦 𝑏𝑖𝑙𝑙 𝑟𝑎𝑡𝑒 = 5.5%
14. You buy a zero coupon bond at the beginning of the year that has a face value of P1,000, a YTM
of 7 percent, and 25 years to maturity. If you hold the bond for the entire year, how much in
interest income will you have to declare on your tax return?
𝑓𝑎𝑐𝑒 𝑣𝑎𝑙𝑢𝑒
𝑃0 =
(1 + 𝑟)𝑛
1,000
𝑃0 =
(1 + 7%)25
𝑃0 = 184.249
𝑓𝑎𝑐𝑒 𝑣𝑎𝑙𝑢𝑒
𝑃𝑦𝑒𝑎𝑟 1 =
(1 + 𝑟)𝑛
1,000
𝑃𝑦𝑒𝑎𝑟 1 =
(1 + 7%)25−1
𝑃𝑦𝑒𝑎𝑟 1 = 197.147
𝐼𝑚𝑝𝑙𝑖𝑒𝑑 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 = 𝑃1 − 𝑃0
𝐼𝑚𝑝𝑙𝑖𝑒𝑑 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 = 197.147 − 184.249
𝐼𝑚𝑝𝑙𝑖𝑒𝑑 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 = 12.897

15. Assume that Leomhelle Corp. P1,000-par-value bond had a 5.7% coupon, matured on May 15,
2020, had a current price quote of 97.708, and had a yield to maturity (YTM) of 6.034%. What is
the bond’s current yield?
1,000 ∗ 5.7%
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑖𝑒𝑙𝑑 =
97.708
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑖𝑒𝑙𝑑 = 0.5833

Bonus Question: If Treasury bills are currently paying 4.5 percent and the inflation rate is 2.1 percent,
what is the exact real rate?

𝑅𝑒𝑎𝑙 𝑟𝑎𝑡𝑒 = 𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝑟𝑎𝑡𝑒 − 𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒

𝑅𝑒𝑎𝑙 𝑟𝑎𝑡𝑒 = 4.5% − 2.1%
𝑅𝑒𝑎𝑙 𝑟𝑎𝑡𝑒 = 2.4%