RIZAL TECHNOLOGICAL UNIVERSITY

Cities of Mandaluyong and Pasig

Quiz No. 2

Exercises

1. An investor is considering the purchase of a bond currently selling for Php878.50.

The bond has four years to maturity, face value of Php1000 and a coupon rate of 8%.
The appropriate discount rate for investments is 10%.

 Calculate YTM

Given:
MP = 878.50 n = 4 years
FV = 1,000
I = 1,000 * 8% = 80

Solution:
YTM = I + (FV – MP) / n = 80 + (1,000 – 878.50) / 4 = 80 + 30.375 = 110.375
(FV + MP / 2) (1,000 + 878.50 / 2) 939.25 939.25

YTM = 0.1175 or 11.75%

 Based on the calculation, should the investor purchase the bond?

Yes, because it tends to be less volatile and less risky than stocks, and when held to
maturity can offer more stable and consistent returns.

2. An investor recently purchased a bond with Php1000 par value, 10% coupon rate and
six years to maturity. The bond makes annual payments. The investor paid Php 1032.50
for the bond.

 What is the YTM of the bond?

Given:
MP = 1,032.50 n = 6 years
FV = 1,000
I = 1000 * 10% = 100
 RIZAL TECHNOLOGICAL UNIVERSITY
Cities of Mandaluyong and Pasig

Solution:
YTM = I + (FV – MP) / n = 100 + (1,000 – 1,032.50) / 6 = 100 + -5.417 = 4.583 _
(FV + MP / 2) (1,000 + 1,032.50) / 6 338.75 338.75

YTM = 0.2792 or 27.92%

 If the bond can be called two years from now at a price of Php1080, what is
YTC?

Given:
C = 1,000 * 10% = 100 t = 2 years
P = 1,032.50
CP = 1,080

Solution:
YTC = C + (CP – P) / t = 100 + (1,080 – 1,032.50) / 2 = 100 + 23.75 = 3.75 _
(CP + P) / 2 (1,080 + 1,032.50) / 2 1,056.25 1,056.25

YTC = 0.1172 or 11.72%

 Would such a call be advantageous for the investor?

YTC can be advantage for investor when the interest rate is low since in this data the
YTC reach the coupon rate, but as you can see the YTM is lower than the interest rate.

3. A company issues a deep discount bond of the face value of Php5000 at an issue
price of Php 3550. The maturity period of the bond is 7 years. Determine the spot rate of
the bond.

Given:
FV = 5,000 t = 7 years
PV = 3,550

Solution:
Market Value = Face Value = 3,550 = 5,000 _
(1 + r)t (1 + r)7
(1 + r)7 = 5,000 = √7 1.408
3,550
 RIZAL TECHNOLOGICAL UNIVERSITY
Cities of Mandaluyong and Pasig

= 1.05 – 1 = 0.05 or 5%
4. A bond of Php1000 was issued five years ago at a coupon rate of 6%. The bond had
a maturity period of 10 years redeemable at par. The market interest rate currently is
10%. Determine the value of the bond.

Given:
C = 1,000 * 6% = 60 n = 10 years
F = 1,000
r = 10% or 0.10

Solution:
Bond Price = C * 1 – (1 + r)-n + ___F___ = 60 * 1 – (1 + 0.10%)-10 + ___1,000___
r (1 + r)n 0.10 (1 + 0.10)10

= 60 * 1 – (1.1)-10 + __1,000__ = 60 * 0.614 + _1,000_ = 60 * 6.14 + 385.51

0.10 2.594 0.10 2.594

= 368.4 + 385.51

Bond Price = 753.91

5. A 20-year, 10% coupon rate bond has Php1000 face value. The market rate of
interest is 8%. Compute the intrinsic value of this bond if it has five years remaining to
maturity. Assume the interest is paid

 Annually

Given:
C = 1,000 * 10% = 100 r = 8%
n = 5 years
FV = 1,000

Solution:
P0 = C * PVAF (r%, n) + FV * PVF (r%, n)
= 100 * PVAF (8%, 5) + 1,000 * PVF (8%, 5)
= 100 * 3.9927 + 1,000 * 0.6806
= 399.27 + 680.6
= 1,079.87
 RIZAL TECHNOLOGICAL UNIVERSITY
Cities of Mandaluyong and Pasig

 Semi-annually

Given:
C = 1,000 * 10% * ½ = 50 r = 8% * ½ = 4%
n = 5 * 2 = 10 years
FV = 1,000

Solution:
P0 = C * PVAF (r%, n) + FV * PVF (r%, n)
= 50 * PVAF (4%, 10) + 1,000 * PVF (4%, 10)
= 50 * 8.1109 + 1,000 * 0.6756
= 405.545 + 675.6
= 1,081.14

 Quarterly

Given:
C = 1,000 * 10% * ¼ = 25 r = 8% * ¼ = 2%
n = 5 * 4 = 20 years
FV = 1,000

Solution:
P0 = C * PVAF (r%, n) + FV * PVF (r%, n)
= 25 * PVAF (2%, 20) + 1,000 * PVF (2%, 20)
= 25 * 16.3514 + 1,000 * 0.6730
= 408.785 + 673
= 1,081.78

6. A Php 1000 par value bond carrying a coupon rate of 10% maturing after 5 years is
being considered. The present market price of this bond is Php900. The reinvestment
rate applicable to future cash flows is 12%. Calculate YTM

Solution:
0 1 2 3 4 5
Investment 900
Annual Interest 100 100 100 100 100
Reinvestment Period (12%) 4 3 2 1 0
FV of CF’s 157.4 140.5 125.4 112 100
Maturity Value 1,000
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Cities of Mandaluyong and Pasig

Total FV = 157.4 + 140.5 + 125.4 + 112 + 100 + 1,000 = 1,635.3

To calculate realized YTM,

Present Market Price (1 + r)5 = Future Value

900 (1 + r)5 = 1,635.3
(1 + r)5 = 1,635.3 / 900
= 1.817
r = √5 x−1
0.11 or 11%

7. A new bond with face value Php100 is issued at a coupon rate of 15% and maturity
period of 5 years. It is redeemable at par. Calculate the bond duration.

Solution:
Time Period Cash Flows PVF (15%) PV * CF PV * Year
1 15 0.8696 13.0435 13.0435
2 15 1.6257 11.3426 22.6852
3 15 2.2832 9.8627 29.5881
4 15 2.8550 8.5763 34.3052
5 15 3.3522 7.4577 37.2885
5 115 3.3522 57.1753 285.8765
107.4581 422.787

D = 422.787 / 107.4581 = 3.93 years

8. An investor has a 14% debenture with face value Php100 that matures at par in 15
years. The debenture is callable in 5 years at Php114. It is currently selling for Php105.

Given:
Face Value = 1,000 Coupon Rate =
Market Price = 105
Expected Price = 5 years

 YTM

 YTC
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Cities of Mandaluyong and Pasig

 Current Yield

9. A person owns a Php1000 face value bond with 5 years to maturity. The bond makes
annual interest payments Php 80. The bond is currently priced at Php960. Given that
the market interest rate is 10%, should the investor hold or sell the bond?

Given:
FV = 1,000 r = 8% or 0.08
MV = 5 years

Solution:
Interest Payment = FV * r
= 1,000 * 0.08 = 80

Current Yield = Interest Payment / Current Price * 100

= 80 / 960 = 0.0833 * 100
= 8.33%

10. A bond pays interest annually and sells for Php835. It has 6 years remaining to
maturity and a par value of Php 1000. What is the coupon rate if is promised a YTM of
12%?