Bonds

Bonds
Cruzat Denesse
Pentinio Kriscel
Guavez Donna
Bonds
A bond is a written contract by a debtor to pay a
final amount on an indicated future date, and to pay a
periodic interest based on the principal of the bond.

When the bond is said to be redeemed at par, the

redemption price is equal to the face value. A bond is
said to be redeemable at a premium when it contains
the promise that on redemption date it will be
redeemed for more than its face value.
Definition of Terms
1. Face value or par value. It is the borrowed principal
mentioned on the bond.
2. Redemption value. It is the final amount at which the bond
will be paid on the redemption date.

3. Coupon. It is a contract of payment of interest on the face

value of the bond on a corresponding date.
4. Redemption date. It is the indicated date of redeeming the bond. It may be
the same as the maturity date or a different date.

5. Bond rate. It is the stated rate at which the bond promises to pay
interest on its face value.

6 .Redemption rate. It is the rate on the principal of the bond and it is

used in computing the redemption value.

7. Investment rate or yield rate. It is the rate of profit realized by the

purchaser of the bond.
Bond Formulas:
1. Redemption value
V = HR
2. Coupon payment
K = Hr
3. General method for computing the value of a bond at the investor's rate, the
coupon period is the same as the investor's interest period.
NOTATIONS:
H - face value of bond
V - redemption value of the bond
P - purchase price of a bond; value of a bond
K - coupon payment
i - investment rate per period i
Br - bond rate
r - bond rate per period
R - redemption rate
Y - investment or yield rate
Bp - bond premium
Bd - bond discount
n - number of periods from purchase date to redemption date
k - accrued interest
Mq - market quotation
Q - quoted price or book value
4. Value of a bond based on premium method. Bond rate is greater than
investment rate.

5. Value of

Value of a bond based on discount method. Bond rate is less than

investment rate.
6. Accrued interest
k = HBr (No. of Days)
360
7. Quoted price also called "and-interest-price". It is also
called the book value of the bond from the investor's
standpoint.
Q = HMq
8. Purchase price of a bond based on market quotation or
flat price of a bond.
P=k+Q
9. Estimated yield rate
a. Ave. invested principal = (V + Q)
2
b. Ave. annual interest = (V + Kt) - Q
t
c. Y = Ave. annual interest
Ave. invested principal
 EXAMPLE PROBLEM

1. A ₱1,000, 6% bond with semi-annual coupons will be redeemed at par at the end
of 15 years.
a. Find the purchase price of the bond by the general method and also by the
premium or discount method, yield 1) 4%; 2)8%
b. Determine the premium of discount in each situation in (a).
c. if the bond is redeemed at 110%, find the value and the premium of the bond
to yield 4%.
 Solution ;
a. 1) General Method
Formula;
P=V (1+ i)-n + K(a ₙ┐ᵢ )
solution;
=₱1,000(1+2%) ⁻³⁰+₱30a ₃₀┐ ₂%
= ₱1,000 (0.55207089) + (30)(22.39645555)
= 552.0909 + 671.8937
= ₱1,223.96
 a. 2) general method

formula;
P = V (1 + i)⁻ⁿ + K (ɑ ₙ┐ᵢ)

solution;
P = ₱1,000 (1 + 4%) ⁻³⁰+ ₱30 ɑ ₃₀┐ ₄%
= ₱1,000 (0.30831867) + 30(17.29203330)
= ₱827.08
 Discount method, 6% < 8%

Formula;
P= H − ( Hi − Hr) ɑ ₙ┐ ᵢ

Solution;
= ₱1,000 −(₱40 − ₱30) ɑ ₃₀┐ ₄%
= ₱1,000 − 10 (17.2920330)
= ₱827.08
 Premium method;6%>4%
Formula;
P = H + (Hr-Hi) ɑₙ
P = H + (Hr-Hi) ɑₙ┐ᵢ

Solution;
= ₱1,000 +(₱30 - ₱20) ɑ ₃₀┐ ₂%
= ₱1,000 + 10 (22.39645555)
= 1,000 + 223.9646
= ₱1,223.96
 Discount method, 6% < 8%
b. In a. 1.) the bond rate is purchased at a premium because the bond rate is
greater than the yield rate, or P>V.
Formula;
Bp = P−V
Solution;
= ₱1,223.96 - ₱1,000
=₱223.96
Since the bond rate is less than the yield rate, or P<V in
c. 2), the bond is purchased at a discount.
Bd = V-P
= ₱1,000 −₱827.08
= ₱172.92
 C.Value or purchase price of the bond

P= V(1+i) ⁻ⁿ+ka ₙ┐ ᵢ
=₱1,100(1+2%)⁻³⁰+₱30ɑ₃₀┐₂%
=₱1,100(0.55207089)+30(22.39645555)
=₱1,279.17
Premium of the bond
Bp=P-V
= ₱ 1,279.17- ₱1,100
= ₱ 179.17
2.A ₱1,000, 6% bond pays interest on January 1 and July 1 a)Find the flat price on
September 1, If the bond is quoted at 96 3l4% and accrued interest. b)If the
flat price on September 1 is ₱985, find the market quatation then on price
and accrued interest basis.
 Solution;

a; September 1 is 2 months after July 1, the accrued interest is

K= ₱1,000(.06)(2l12)= ₱10

Q or “and-interest-price”
=(96 3l4 %)( ₱1,000)
= ₱967.50

Therefore P(flat price)

= ₱967.50+ ₱10= ₱977.50

b. K (accrued interest on September 1 )= ₱10

Q= P-K
= ₱985- ₱10
= ₱977.50

Since ₱ 975 is 97.5 % of ₱1,000, the market quotation is 97.5

3. What is the yield rate compounded annually for ₱1,000, 8%. M=1 bond with
quoted price at 104 and redeemable at 110% at the end of 9 years.
 solution;
Ave. investment = V +Q
2
= ₱1,100+ ₱1040
2
= ₱1,070

Ave. Annual Interest =(V=Kt)-Q

t

= ( ₱ 1,100+ ₱80( 9)- ₱ 1,040

9
= ₱86.67

Y= Ave. Annual Interest

Ave. Investment
= ₱86 .67
₱1,070
=8.1%
 EXERCISE
A. $2500 bond pays interest at 8% semi-annually and is redeemable at par at the
end of 5 years. Determine the purchase price to yield a holder, if the bond pays
10% compounded annually.

B. A $5000 bond maturing at 105 on September 1, 2031, has semi-annual coupons

at 7%. Determine the purchase price on March 1, 2010 to guarantee a yield of
𝑗2=6.8%.