BOND VALUATION

ANSWERS TO CHAPTER EXERCISE

I. Bond value and interest computation: at par, premium and discount.

▪ Assume that the bond with similar risk yields a rate of 8%:
1. Is the bond issued at face, at a premium or at a discount?
FACE because the Effective Interest Rate (8% yield) is equal to Nominal
80
Interest Rate (8% = 1,000
)

2. What is the value of the bond upon issuance?

The price of the bond is P1,000 since it was issued at face value.

3. Determine the value of the bond 5 years after issuance.

A bond issued at face value will not change until its maturity, hence, the
value of the bond after 5 years will still be at P 1,000.

4. What is the amount of interest expense paid on December 31, 2016 and
2017?
Interest Expense is equal to Bond value multiplied by the effective
interest rate. Hence, the interest expense on December 31, 2016 and
2017 amounted to P80 = (8% x 1,000) per year.

5. What is the value of the bond at maturity date?

The value of the bond at maturity date is always equivalent to the face
value whether it was issued initially at face, discount or premium.
Therefore, the value of the bond is P 1,000.

▪ Assume that the yield to maturity on the said bond is 9% instead of 8%:
6. What is the value of the bond upon issuance on January 1, 2016?
𝐵𝑃𝑜 = [ 𝑃𝑉𝐶𝑜𝑢𝑝𝑜𝑛 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 + 𝑃𝑉𝐹𝑎𝑐𝑒 𝑣𝑎𝑙𝑢𝑒]

𝐵𝑃𝑜 = [ 𝑃 80(6. 41765) + 𝑃 1000 (0. 42241)]

𝐵𝑃𝑜 = 𝑃 513. 41 + 𝑃 422. 41

𝐵𝑃𝑜 = 𝑃935. 82
● Use 9% EIR for PV factor computation in 10 periods.
● Coupon payment = NIR x Face Value

7. What is the value of the bond on January 1, 2018?

1. BPo x (1+EIR) –CP = BP1
= 935.82 x (1+0.09) – 80 = BP1 (940.04) – January 1, 2017
2. BP1 x (1+EIR) –CP = BP2
= 940.04 x (1+0.09) – 80 = BP1 (944.65) – January 1, 2018

8. What is the amount of interest expense paid on December 31, 2016 and
2017?
 ● Interest expense = BP x EIR
1. 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 = [𝐵𝑃𝑜 𝑋 𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝐼𝑛𝑒𝑡𝑒𝑟𝑒𝑠𝑡 𝑅𝑎𝑡𝑒]

𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 (2016) = [935. 82 𝑥 0. 09]

𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 (2016) = 84. 22

2. 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 = [𝐵𝑃1 𝑋 𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝐼𝑛𝑒𝑡𝑒𝑟𝑒𝑠𝑡 𝑅𝑎𝑡𝑒]

𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 (2017) = [940. 04 𝑥 0. 09]

𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 (2017) = 84. 60

9. What is the value of the bond on December 31, 2023?

● December 31, 2023 is 2 years prior to the maturity date. It is settled that
on the maturity date, the value of the bond is always equal to its face
value (P1,000). Hence, it is convenient to use the Retrospective approach
of amortization to compute the said bond value on December 31, 2023.
● If BPo x (1+EIR) – CP = BP1 ; it follows that (using prospective
approach):
BP(Dec. 2024) x (1+EIR) – CP = BP (Dec. 2025)
● Hence, using retrospective approach:
I. BP (Dec. 2025) +CP ÷ (1+EIR) = BP (Dec. 2024)
- 1,000 + 80 ÷ (1+0.09) = 990.8256 (Dec. 2024)
II. BP (Dec. 2024) +CP ÷ (1+EIR) = BP (Dec. 2023)
- 990.8256 + 80 ÷ (1+0.09) = 982.41 (Dec. 2023)

10. What is the value of the bond on December 31, 2025?

It is settled that on the maturity date, the value of the bond is always
equal to its face value (P1,000) even if it was issued at discount.

▪ If the yield to maturity on the said bond is 7% instead of 8%:

11. What is the value of the bond upon issuance on January 1, 2016?
𝐵𝑃𝑜 = [ 𝑃𝑉𝐶𝑜𝑢𝑝𝑜𝑛 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 + 𝑃𝑉𝐹𝑎𝑐𝑒 𝑣𝑎𝑙𝑢𝑒]

𝐵𝑃𝑜 = [ 𝑃 80(7. 02358) + 𝑃 1000 (0. 508349)]

𝐵𝑃𝑜 = 𝑃 561. 8865 + 𝑃 508. 349

𝐵𝑃𝑜 = 𝑃1, 070. 24

● Use 7% EIR for PV factor computation in 10 periods.
● Coupon payment = NIR x Face Value

12. What is the value of the bond on January 1, 2018?

1. BPo x (1+EIR) –CP = BP1
= 1,070.24 x (1+0.07) – 80 = BP1 (1,065.15) – January 1, 2017
2. BP1 x (1+EIR) –CP = BP2
= 1,065.15 x (1+0.07) – 80 = BP1 (1,059.71) – January 1, 2018
 13. What is the amount of interest expense paid on December 31, 2016 and
2017?
● Interest expense = BP x EIR
1. 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 = [𝐵𝑃𝑜 𝑋 𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝐼𝑛𝑒𝑡𝑒𝑟𝑒𝑠𝑡 𝑅𝑎𝑡𝑒]

𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 (2016) = [1, 070. 24 𝑥 0. 07]

𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 (2016) = 74. 92

2. 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 = [𝐵𝑃1 𝑋 𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝐼𝑛𝑒𝑡𝑒𝑟𝑒𝑠𝑡 𝑅𝑎𝑡𝑒]

𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 (2017) = [1, 065. 15 𝑥 0. 07]

𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 (2017) = 74. 56

14. What is the value of the bond on December 31, 2023?

● If BPo x (1+EIR) – CP = BP1 ; it follows that (using prospective

approach):
BP(Dec. 2024) x (1+EIR) – CP = BP (Dec. 2025)
● Hence, using retrospective approach:
I. BP (Dec. 2025) +CP ÷ (1+EIR) = BP (Dec. 2024)
- 1,000 + 80 ÷ (1+0.07) = 1009.35 (Dec. 2024)
II. BP (Dec. 2024) +CP ÷ (1+EIR) = BP (Dec. 2023)
- 1,009.35 + 80 ÷ (1+0.07) = 1,018.08 (Dec. 2023)

15. What is the value of the bond on December 31, 2025?

It is settled that on the maturity date, the value of the bond is always
equal to its face value (P1,000) even if it was issued at premium.

II. Yield to Maturity (YTM) or Effective Interest Rate Computation:

1. If the bond sells at 95, what is the Yield to Maturity?

I. BP = 95% X (Face Value)
BP = 0.95 X 1,000
BP = 950
II. YTM Computation:

YTM = CP + [(Face Value – Bond Value)/ t]

Bond Value (0.6) + Face Value (0.4)

YTM = 100 + [(1,000 – 950)/ 10]

950 (.6) + 1,000 (0.4)
III.
IV.
 V.
105
YTM= 970
= 10.82%

2. If the bond sells at 100, what is the discount rate?

I. BP = 100% X (Face Value)

BP = 1.0 X 1,000
BP = 1,000
II. YTM Computation:

YTM = CP + [(Face Value – Bond Value)/ t]

Bond Value (0.6) + Face Value (0.4)

YTM = 100 + [(1,000 – 1,000)/ 10]

1,000(.6) + 1,000 (0.4)

100
YTM= 1,000
= 10%

3. If the bond sells at 105, what is the effective interest rate?

I. BP = 105% X (Face Value)

BP = 1.05 X 1,000
BP = 1,050
II. YTM Computation:

YTM = CP + [(Face Value – Bond Value)/ t]

Bond Value (0.6) + Face Value (0.4)

YTM = 100 + [(1,000 – 1,050)/ 10]

1,050(.6) + 1,000 (0.4)

95
YTM= 1,030
= 9.22%
III. Bond value and interest expense: Bond with semi-annual coupon:

1. Is the bond issued at face, at a premium or at a discount?

Since the Effective (9%) is Higher than Nominal Interest (8%), the bond
is valued at Discount.

2. What is the value of the bond upon issuance?

● Since it is a Semi-annual coupon payment, use 4.5% [ 9% ÷ 2 per year] to

compute for the PV factors and convert 5 years into 10 periods. [5years x
2 per year]

𝐵𝑃𝑜 (𝐽𝑢𝑛𝑒 30, 2015) = [ 𝑃𝑉𝐶𝑜𝑢𝑝𝑜𝑛 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 + 𝑃𝑉𝐹𝑎𝑐𝑒 𝑣𝑎𝑙𝑢𝑒]

𝐵𝑃𝑜 = [ 𝑃 40(7. 912718) + 𝑃 1000 (0. 643927)]

𝐵𝑃𝑜 = 𝑃 316. 51 + 𝑃 643. 93

𝐵𝑃𝑜 = 𝑃960. 44

3. What is the value of the bond on December 31, 2015?

BPo(June 15, 2015) x (1+EIR) – CP = BP (December 31, 2015)
= 960.44 x (1.045) – 40 = 963.66

4. How much is the total interest payment in 2015?

● Interest payment is different from interest expense since the bond
was issued at a discount.
● Interest Payment is equivalent to coupon payment, hence, the
answer is P40.

5. What is the value of the bond on December 31, 2016?

BP1(December 31, 2015) x (1+EIR) – CP = BP2 (June 30, 2016)

= 963.66 x (1.045) – 40 = 967.02 (June 30, 2016)
BP2(June 30, 2015) x (1+EIR) – CP = BP3 (December 31, 2016)
= 967.02 x (1.045) – 40 = 970.54 (June 30, 2016)

6. What is the value of the bond at maturity date?

It is settled that on the maturity date, the value of the bond is always
equal to its face value (P1,000) even if it was issued at premium.

7. How much is the total interest expense in 2016?

● Interest expense = BP x EIR

1. 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 = [𝐵𝑃𝑜 𝑋 𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝐼𝑛𝑒𝑡𝑒𝑟𝑒𝑠𝑡 𝑅𝑎𝑡𝑒]

𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 (𝐷𝑒𝑐. 31, 2015 𝑡𝑜 𝐽𝑢𝑛𝑒 30, 2016) = [963. 66 𝑥 0. 045]

𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 (2016) = 43. 36

 2. 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 = [𝐵𝑃1 𝑋 𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝐼𝑛𝑒𝑡𝑒𝑟𝑒𝑠𝑡 𝑅𝑎𝑡𝑒]

𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 (𝐽𝑢𝑛𝑒 30 𝑡𝑜 𝐷𝑒𝑐𝑒𝑚𝑏𝑒𝑟 31, 2016) = [967. 02 𝑥 0. 045]

𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 (2017) = 43. 52

IV. Bond value, interest expense and YTM computation: Bond with
semi-annual coupon
1. What is the price of the bond today?

ETR = Current Yield + Capital Gain/(Loss) Yield

CY = CP
BP o

9.2% = 40 + 40
BP o

BP o = 80
0.092

BP o = 869.57

2. What is the amount of interest expense in year 1?

I. Compute for the Effective interest rate using the YTM formula

YT
M = CP + [(Face Value – Bond Value)/ t]
Bond Value (0.6) + Face Value (0.4)
 YTM = 40+ [(1,000 – 869.57)/ 10]
869.57 (.6) + 1,000 (0.4)

53.043
YTM (EIR) = 921.74
= 5.7546%

II. The YTM or EIR shall be multiplied with the BP today to compute the
interest expense for the first 6 months.

III. Interest expense = BP x EIR

1. 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 = [𝐵𝑃𝑜 𝑋 𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝐼𝑛𝑒𝑡𝑒𝑟𝑒𝑠𝑡 𝑅𝑎𝑡𝑒]

𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 (0 − 6 𝑚𝑜𝑛𝑡ℎ𝑠) = [869. 57 𝑥 0. 057546 ]

𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 (2016) = 50. 04

2. 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 = [𝐵𝑃1 𝑋 𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝐼𝑛𝑒𝑡𝑒𝑟𝑒𝑠𝑡 𝑅𝑎𝑡𝑒]

𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 (6 − 12 𝑚𝑜𝑛𝑡ℎ𝑠 ) = [879. 61 𝑥 0. 057546]

𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 (2017) = 50. 62

3. What is the price of the bond on the 2nd year? 913.29

FIRST YEAR:
BP0(January 1, 2015) x (1+EIR) – CP = BP1 (June 30, 2015)
= 869.57 x (1.0575) – 40 = 879.61 (June 30, 2015)
BP1(June 30, 2015) x (1+EIR) – CP = BP2 (December 31, 2015)
= 879.61 x (1.0575) – 40 = 890.19 (December 31, 2015)

SECOND YEAR:
BP2(January 1, 2016) x (1+EIR) – CP = BP3 (June 30, 2016)
= 890.19 x (1.0575) – 40 = 901.41 (June 30, 2016)
BP3(June 30, 2015) x (1+EIR) – CP = BP4 (December 31, 2016)
= 901.41 x (1.0575) – 40 = 913.29 (December 31, 2016)

4. What is the yield to maturity? 11.5092% (annual)

YTM = CP + [(Face Value – Bond Value)/ t]

Bond Value (0.6) + Face Value (0.4)

YTM = 40+ [(1,000 – 869.57)/ 10]

869.57 (.6) + 1,000 (0.4)
 53.043
YTM (EIR) = 921.74
= 5.7546% (semi-annual)

YTM = 11.5092% (annual)

5. What is the value of the bond on the 5th year?

It is settled that on the maturity date, the value of the bond is always
equal to its face value (P1,000) even if it was issued at discount.

V. Bond valuation and Yield to Call (YTC) Computation: Callable Bond and
Zero Coupon Bond

1. Calculate the price of each bond at each of the following years to maturity:
A. PLBT Price today
𝐵𝑃𝑜 (𝑃𝐿𝐵𝑇) = [ 𝑃𝑉𝐶𝑜𝑢𝑝𝑜𝑛 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 + 𝑃𝑉𝐹𝑎𝑐𝑒 𝑣𝑎𝑙𝑢𝑒]

𝐵𝑃𝑜 = [ 𝑃 100(3. 99271) + 𝑃 1000 (0. 680583)]

𝐵𝑃𝑜 = 𝑃 399. 27 + 𝑃 680. 58

𝐵𝑃𝑜 = 𝑃1, 079. 85

BP1= 1066.24
BP2= 1,051.54
BP3= 1,035.66
BP4= 1,018.51
BP5= 1,000

B. MEC Price today

𝐵𝑃𝑜 (𝑀𝐸𝐶) = [ 𝑃𝑉𝐶𝑜𝑢𝑝𝑜𝑛 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 + 𝑃𝑉𝐹𝑎𝑐𝑒 𝑣𝑎𝑙𝑢𝑒]

𝐵𝑃𝑜 = [ 𝑃 0(3. 99271) + 𝑃 1000 (0. 680583)]

𝐵𝑃𝑜 = 𝑃 0 + 𝑃 680. 58

𝐵𝑃𝑜 = 𝑃680. 58
BP1= 735.02
BP2= 793.83
BP3= 857.33
BP4= 925.92
BP5= 1,000

2. Can the issuer call the PLBT bond in year 1?

 No because the call protection period is until year 1. The issuer can call
starting year 2.
3. Is the issuer expected to call the PLBT bond in year 2?
Yes, because the bond price of 1,051.54 is higher than the call price of
1,030.
● The following are the instances when the issuer will be expected to
call the bond provided that the call protection period has already
expired:
I. If the Bond Price is > Call Price
II. If the YTM is > YTC

4. Will the issuer call the PLBT bond in year 3? Yes

5. Can the issuer call the PLBT bond in year 4? Yes
6. When is the latest that the issuer be expected to call the PLBT bond? Year 3
7. If the bond will be redeemed by the issuer in year 2, what is the yield to call
(YTC)?

YTC(2
) = [CP + (Call Price – Bond Price)/ n]
Bond Price (0.6) + Call Price (0.4)

YT
C = [ P100 + (P1030 - P1,079.85)/ 2]
P1,079.85 (0.6) + P1030 (0.4)

YT
C = P75.075
P1059.91

YTC(2) = 7.08%

8. If the bond will be called in year 3, what is the yield to call (YTC)?

YTC(3
) = [CP + (Call Price – Bond Price)/ n]
Bond Price (0.6) + Call Price (0.4)

YT
C = [ P100 + (P1030 - P1079.850)/ 3]
P1,079.85 (0.6) + P1030 (0.4)
 YT
C = P83.38
P1059.91

YTC(3) = 7.87%

9. If the bond will be called in year 4, what is the yield to call (YTC)?
8.28%

YTC(4
) = [CP + (Call Price – Bond Price)/ n]
Bond Price (0.6) + Call Price (0.4)

YT
C = [ P100 + (P1030 - P1079.850)/ 4]
P1,079.85 (0.6) + P1030 (0.4)

YT
C = P87.5375
P1059.91

YTC (4) = 8.26%

10. What return will the bondholder expect from PLBT bond, YTM or YTC and why?
The bondholder should expect YTC because it is advantageous on the part
of the issuer to exercise its right to call until the third year. However, if the
issuer failed to redeem in year 3, the bondholder should expect YTM since
the Bond price in year 4 is lower than the call price.

VI. Bond Expected Total Return: Current Yield and Capital Gains/(loss) yield
1. What is the current yield on December 31, 2015? 9.12% - (the BP0 877.11)

I. ETR = Current Yield + Capital Gain/(Loss) Yield

ETR = CP + BPn - BP o
BP o BP o

II. 𝐵𝑃𝑜 = [𝑃𝑉𝑐𝑝 + 𝑃𝑉𝐹𝑎𝑐𝑒]

𝐵𝑃𝑜 = [ 𝑃 80(6. 14456) + 𝑃 1000 (0. 0. 38553)]
 𝐵𝑃𝑜 = 𝑃 491. 56 + 𝑃 385. 55

𝐵𝑃𝑜 = 𝑃877. 11

III. CY = CP
BP o

CY = 80
877.11

CY = 9.12%

2. What is the Capital gain / (loss) yield on December 31, 2015? 0.88%

I. ETR = Current Yield + Capital Gain/(Loss) Yield

ETR = CP + BPn - BP o
BP o BP o

CG/L
Y = BPn - BP o
BP o

CG/L
Y = 884.82 - 877.11
877.11

CG/L
Y = 0.88%

● Since there is no change in the market rate and there is no available

selling price of the bond, use the amortized value next year for BPn in
order to compute the capital gain or loss yield.

3. If Hendrick sold the bond to Lucio on December 31, 2015 for P 900, what is
the capital gain/ (loss) yield? 2.61%
 ● Since there is available selling price of the bond, the BPn should not be
the amortized value next year but the available selling price given in the
problem. It is as assumed to be the price or amount that the bondholder
will receive in order to compute the capital gain or loss yield.

CG/L
Y = BPn - BP o
BP o

CG/L
Y = 900 - 877.11
877.11

CG/L
Y = 2.61%

4. If Hendrick sold the bond to Lucio on December 31, 2015 for P 950, what is
the Total Rate of Returns? 17.43% = 9.12% + 8.31%

ET
R = CP + BPn - BP o
BP o BP o

ET
R = 80 + 950 - 877.11

877.11 877.11

9.12% 8.31
ETR = + %

ETR = 17.43%

5. If the market rate on January 1, 2016 decreased to 9%, and Hendrick sold the
said bond on the same day, what is the total return on the bond?

Since there is change in the market rate, the BPn should not be the amortized
value next year but the recalculated price of the bond using the new rate of
 9% given in the problem. In computing the BPn (New Bond price), the new
market rate will be used for the present value factors (PV1 and PVoa) and
use only the remaining 9 periods. The BPn is as assumed to be the price or
amount that the bondholder will receive in order to compute the capital gain or
loss yield.

80+[940.05−877.11]
(Bp new at 9% and 9 periods is 940.05) = 16. 30% = 877.11

ET
R = CP + BPn - BP o
BP o BP o

ET
R = 80 + 940.05 - 877.11

877.11 877.11

9.12% 7.175
ETR = + %

ETR = 16.30%

6. If the market rate on January 1, 2016 increased to 12%, and Hendrick sold
the said bond on the same day, what is the total return on the bond?

80+[786.87−877.11]
(Bp new at 9% and 9 periods is 786.87) = − 1. 16% = 877.11

ET
R = CP + BPn - BP o
BP o BP o

ET
R = 80 + 786.87 - 877.11

877.11 877.11
 9.12%
ETR = + (-10.29%)

ETR = (-1.16%)

7. If the market rate on January 1, 2016 decreased to 8%, and Hendrick does
not intend to sell the said bond, what is the total return on the bond?

10% because the bondholder will not sell.

Since the bondholder does not intend to sell the bond, the change in the market
rate or any available selling price in the market will not be used in computing for
the BPn, hence, the BPn should be the amortized value next year. It is noted that
the Expected total return (ETR) of the bondholder, who will not sell but hold the
bond until maturity, is equivalent to YTM (Yield to Maturity).

TRUE or FALSE: Write X if the statement is true while M if false.

1. X
2. X
3. X
4. X
5. M- interest rate risk. (it must be reinvestment risk)
6. M - bond is priced lower than face value. (it must be higher – Premium Bond)
7. X
8. X
9. X
10. M - also a decrease in the Bond price. (Interest rate and Bond price has inverse
relationship)
11. X
12. X
13. X
14. M bonds at maturity date.
15. M - Call Price is higher than the computed Bond Price
16. X
17. X
18. X
19. M- present value single payment of interest and the present value annuity of the
par value.
20. X

MULTIPLE CHOICE QUESTIONS: Choose the letter of the best answer.

THEORIES:

1. B.
 2. D.
3. B.
4. D.
5 C.
6. C.
7. B.
8. C.

9. D.
10. C.
11. C.
12. C.
13. B.
14. A.
15. B.

PROBLEMS: (Use at least five decimal places for the present value factors)

1. How much will James Band pay if he invests in A.M. Bond today?
A. 852.66
B. 857.88
C. 1,000.00
D. 1,152.12

2. How much will James Band pay if he invests in B.Y Bond today?
A. 852.66
B. 857.88
C. 1,000,00
D. 1,152.12

3. How much will James Band pay if he invests in C.J Bond?

A. 847.88
B. 857.88
C. 1,000,00
D. 1152.12
4. Calculate the Current Yield of C.J Bond?
A. 9.43 percent
B. 10.32 percent
C. 10.42 percent
D. 11.32 percent

5. Calculate the Current Yield of B.Y. Bond?

A. 9.43 percent
B. 10.00 percent
C. 10.32 percent
D. 11.23 percent

6. Calculate the Current Yield of A.M. Bond?

A. 9.38 percent
B. 10.00 percent
C. 10.42 percent
D. 11.32 percent
7. If the YTM for each bond remains, what will be the value of C.J bond on the 10th
year?
 A. 1,000.00
B. 1,056.37
C. 1,067.48
D. 1,075.82
8. If the YTM for each bond remains, what will be the value of B.Y bond on the 11th
year?
A. 1,000.00
B. 1,056.37
C. 1,067.48
D. 1,075.82

9. What is the discount rate to be used for bond price calculation?

A. Coupon Interest Rate of 7 percent
B. Current Yield of 8 percent
C. Yield to Maturity of 8 percent
D. Stated Interest Rate of 7 percent

10. What is the price of the bond issued by John Doe & Co. today?
A. 924.64
B. 934.64
C. 944.64
D. 1,000

11. What is the current yield for this kind of bond investment?
A. 7 percent
B. 7.57 percent
C. 8 percent
D. 8.57 percent

12. What is the price of the bond issued by John Doe & Co. on the 10th year?
A. 972.16
B. 945.54
C. 982.16
D. 1,000

13. What is the price of the bond issued by John Doe & Co. on the maturity date?
A. 945.54
B. 982.16
C. 990.26
D. 1,000

14. What is the value of the bond upon its issuance?

A. 762.49
B. 752.23
C. 773.99
D. 1,000

15. What is the value of the bond on the 5th year?

A. 817.45
B. 773.99
C. 762.49
D. 752.23
16. If YTM decreases to 10% but PeNoy does not intend to sell the bond, what is the
expected rate of return?
A. 10 percent
B. 9.53 percent
C. 12 percent
D. 8.67 percent

17. What is the price of the BONGBONG-bond if issued today?

A. P 856.00
B. P 924.24
C. P 817.76
D. P 1,000.00

18. What is the Effective interest rate used in discounting the ABI Bond?
A. 7.00%
B. 8.56%
C. 9.05%
D. 10.42%

19. What is the Capital Gains Yield (CGY)?

A. 0.49%
B. 1.56%
C. 1.86%
D. 2.02%

20. How much cash will Diane & Jam expect to receive for interest every year prior to
maturity?
A. P 133.20
B. P 120.00
C. P 100.00
D. P 95.30

21. What is the Yield to Maturity (YTM) of EWB Bond?

A. 9.42 percent
B. 10.23 percent
C. 11.41 percent
D. 12.12 percent

22. What is the price of EWB Bond after 1 year from issuance?
A. P1,110.00
B. P1,101.00
C. P1,080.40
D. P1,000.00

23. After 1 year, the bonds are selling for P1,187 in the market. Taking advantage of the
price of the bonds, “Diane & Jam” sold the bonds to “Lex & Ces”. What is its total
expected rate of return on the investment?
A. 21.43 percent
B. 19.04 percent
C. 18.71 percent
D. 17.74 percent

24. What is the current yield?

A. 10.05%
 B. 10.13%
C. 11.11%
D. 12%

25. What is the Yield to Maturity?

A. 8 percent
B. 9.13 percent
C. 10.13 percent
D. 12 percent

26. What is the Yield to Call if the bond is called in year 4?

A. 7.89 percent
B. 8.20 percent
C. 9.20 percent
D. 9.92 percent.

27. What is the capital gains / (loss) yield on the bond if sold to an investor for P 1,175
after 1 year?
A. 0.17% gain
B. (0.851% loss)
C. 0.843% gain
D. (0.843% loss)

28. What is the capital gains / (loss) yield on bond if sold to an investor for P 1,200 after
1 year?
A. (1.25% loss)
B. (1.27% loss)
C. 1.27% gain
D. 2.29% gain
29. What is the expected total return on bond if sold to an investor for P 1,215 after 1
year?
A. 10.12%
B. 11.05%
C. 12.59%
D. 12.66%

30. What is the real interest rate?

A. 9.19%
B. 9%
C. 8.74%
D. 3.95%