ast : sil NAME: And Lin A. fikad DATE: |-01- 2023 Score: aes |. TRUE OR FALSE (10 points: 10 items x 1 point) + Identify whether the given item is TRUE or FALSE. SHADE the corresponding circle for the correct answer. T funds by promising to repay the lender following the terms of the contract 2. Sinking fund provision of the corporate bond indenture requires a certain portion of the F ‘@) 1. debt securities are paper or electronic obligation that enables the issuing party to raise @ issue to be retired periodically. CO] @D 3. Acaliable bond gives the holder the right to force the issuer to repay the bond before the maturity date on the put dates. @ | 4. The puttable bond allows the issuer of the bond to retain the privilege of redeeming the bond at some point before the bond reaches its date of maturity. @ 5. The price of a puttable bond is always lower than the price of a straight bond because oO the call option adds value to an issuer. 6. Most municipal bonds contain a call provision, which allows the issuer to repurchase the bonds at a specified price before the bonds mature. @| CO 7. The bond valuation includes calculating the future value of the bond’s present interest payments. T)| 8 Abond seling at paris worth an amount equivalent tots original issue value or its value upon redemption at maturity. 9. Stepped-coupon bonds are a variation of the fixed-rate bonds where their coupon increases during the life of the bonds. @ 10. The price of a callable bond is always higher than the price of a straight bond because the call option adds value to an investor. Il MULTIPLE CHOICE (10 points: 10 items x 1 point) ENCIRCLE the letter of the correct answer among the given choices 1. Itis the amount of money a holder will get back once a bond matures, @ Parvalue ©. Market price . Coupon payment 4. Viel 2. They are direct and unconditional obligations of the national government that primarily caters to the retail market or the end-users. a. Treasury Bonds Municipal Bonds B Nmue-crtaicy Real Traaaxy Bons @®)Rerall Tass Bands Bt sah Wands wa cdipn seat ees Cone AOI he Re oe kone @ Fred rate bonds «._Inflationstinked bonds b. Callable bonds d. Puttable bonds 05 Task Performance 1 ce “Property of STI Page 1 of 4&STI M2008 4, They facilitate bond trading by matching up buyers and sellers of bonds in the secondary market. a. Finance companies & Mutual funds Brokerage firms b. Investment banking firms 5. Itis the sale of government securities (GS) exclusively to Government Securities Eligible Dealers (GSEDs) whenever there is an acute shortage of securities in the market. Auction c. Over-the-Counter (OTC) Method @® Tap method 4. Day Orders 6. Allof the following are characteristics ofa bond, EXCEPT: a. Yield & Face Value b. Coupon interest Rate Debentures 7. Allof the following are the general classifications of bonds in the bond market, EXCEPT: Callable Bonds ¢. Municipal Bonds B. Government Sonds 4. Corporate Bonds 8. Which of the following is INCORRECT about the various corporate bonds? a. Mortgage bonds are used to finance a specific project. b._ Inthe event of default, the bondholders of a debenture must go to court to seize the debtor's assets. If the firm fails to make payments as promised, debenture bondholders have the right to liquidate the property to be paid, d. Equipment trust certificates are bonds secured by tangible non-real-estate property, such as heavy equipment and airplanes, 9. Which of the following is CORRECT about the characteristics of bonds? a. When a bond trades at a price lower than the face value, itis said to be selling at a premium. ‘The market price of a bond can be quoted as clean which is the actual price to be paid. © The length of time until the maturity date is often referred to as the term or tenor or | maturity of a bond. 4d. The callable provision of the corporate bond indenture requires a certain portion of the issue to be retired periodically 10. Which of the following is INCORRECT about the participants in the bond market? a. Commercial banks issue bonds to have a source of secondary capital b. Finance companies commonly issue bonds as a source of long-term funds. &. Some mutual funds specialize in particular types of bonds while others invest in all types. @) Brokerage firms place newly issued bonds for government and corporations. 05 Task Performance 1 “Property of ST! Page 2 of 4Ill, CASE ANALYSES: ANALYZE THE CASES AND ANSWER THE GIVEN QUESTIONS. 1. You ae the vce President af Mayan Corporation a financing company You plan to invest the company funds in the long-term bonds, You have P600 million to invest in. You may purchase highly rated municipal bonds at part with | coupon ate of Moreover, you aso have a colce of maturity Between 10ers or 20 yor, Atermaev=t You could purchase highly rated corporate bonds at par with a coupon rate of 8%. These bonds also are offered with atti oF 30 yar 23 yam Ye dona eet id stds ff vee ha dd aU ‘you will sell the bonds because you will need to make a large purchase at that time. a. What is the annual interest you would earn, before taxes, on the municipal bond? ON THE CORPORATE BOND? Annual Interest = Principal (P) x Coupon Rate | + For the municipal bond with a coupon rate of 6% and a principal of P600 | million: Annual Interest = P600 million x 6% = P36 million | ‘+ For the corporate bond with a coupon rate of 8% and a principal of P600 | million: Annual Interest = P60O million x 8% = P48 million b. Ifthe level of credit risk and the liquidity for the municipal and corporate bonds are the same, would you invest in the municipal bonds or the corporate bonds? Why? + Ifthe level of credit risk and liquidity for the municipal and corporate bonds are the same, | would prefer to invest in the Corporate Bonds. The reason for this is that the corporate bonds offer a higher coupon rate of 8% compared to the municipal bonds’ 6%. This means it would earn more annual interest | income from the corporate bonds. Given the same level of risk and liquidity, | it's generally better to choose the investment option with a higher return. 2. To satisfy the demand, Ericson Company may need to increase its production capacity by about 50% over the next. few years. It would need financing to expand and accommodate the increase in production. It considers issuing stock fr bonds to raise the capital next year. The yield curve is currently upward sloping. At a recent meeting of the board of directors, the chief executive officer (CEO) stated his view that the economy will remain strong. So, he wants to expand the business to benefit from the expected increase in demand for Erieson’s products. The chief financial officer (CFO) stated that if Ericson Company needs to obtain long-term funds in financing the expansion plan, the Issuance of fixed-rate bonds would be Ideal at this point. The government has been accelerating its infrastructure projects which resorted to more borrowings. Government debt to GOP has risen from 40% to 50% in one (2) year. Because of thls, the CFO expects interest rates to increase in 12 months. a. If the CFO is correct about future interest rates, what does this suggest about the need to issue bonds? | © if the CFO is correct about future interest rates increasing due to the | government's aggressive borrowing, it suggests that Ericson Company should issue fixed-rate bonds sooner rather than later. Issuing fixed-rate bonds now | would lock in lower interest rates, providing cost certainty and protection against rising interest expenses in the future. (05 Task Performance 1 ABAD'b. What may be the possible reasons why interest rates may remain low despite aggressive goverament borrowings? Possible reasons why interest rates may remain low despite aggressive government borrowings include central bank policies to keep rates low, economic conditions that may not support significant interest rate hikes, and international factors influencing global interest rates. ¢. At the meeting, the CEO said, "The decision to expand should not be dictated by whether interest rates are going to increase or not. Bonds should be issued only if the potential increase in interest rates is attributed to strong demand for loanable funds rather than the BSP’s reduction in the supply of loanable funds.” What does this statement mean? + The CEO's statement means that the decision to expand the business should not be solely based on interest rate movements caused by the central bank's actions (8SP's reduction in the supply of loanable funds). Instead, expansion decisions should be based on broader market demand for loanable funds driven by a strong economy. In other words, the CEO believes that a strong demand for funds resulting from a robust economy is a more important factor to consider when deciding to issue bonds for expansion, rather than reacting to changes in interest rates influenced by central bank policy. (05 Task Performance 1 ‘ABAD