Presented by Jomarie Acabal and Ronel Paradero

Bonds and their

valuation
 What is Bonds?
• A formal unconditional promise, made under seal, to pay a specified sum of
money at a determinable future date, and to make periodic interest payment at
a stated rate until the principal sum is paid.
• Contract of debt between Issuer/Borrower and Bondholder/Investor
• Borrow from the general investing public by corporations or governments.
 With bonds, you With stocks, you
loan a company or own a small portion
government money of a company
Issuance of Bonds
• Equal denomination (P1,000) or Various
denominations (P100, P10,000, etc.)
• Face Amount (P1,000) x Bond certificate (No. of
bonds) = Total Bonds
• Underwriter or Investment Bank
⚬ Assumes responsibility for reselling the bonds
to investors.
• Principal and Interest Payments
⚬ Principal (Installment or Lump Sum)
⚬ Interests (Quarterly, Semi-annually, or
Annually)
 Key Characteristics of Bonds

Par Value / Face Coupon Interest Maturity Date Redemption

Value Rate Value
 Par Value / Face Value
• Stated face value of the bond
• Represents the amount of money an entity borrows and
promises to repay on the maturity date. (e.g. P1,000, P5,000, or
P1 million)
 Coupon Interest Rate
• Coupon Payment
⚬ Bonds require the company to pay a fixed number of pesos of interest
each period (year, semi-annual, quarter).
• Set at date of bond issuance and remains in force during the bond’s life.
• Set at a level that will induce investors to buy the bond at or near its par
value.
• Coupon Interest Rate = Annual Coupon Payment / Face Value
⚬ For example, a bond has a P1,000face value, and pays P100 in interest
each year. (10%)
 Maturity Date
• A specified date on which the par value of a bond must be repaid.
⚬ E.g. bonds were issued on January 1, 2022 and will mature on
December 31, 2031. (10 years)
 Redemption Value
• Amount paid to settle the bonds at a given future time.
⚬ May be equal to Par value or Face value of the bonds.
⚬ Sometimes, the bonds can be redeemed/paid/called higher than the
Par value or Face value of the bonds which can be expressed as a
percentage of the face value but the word percent is omitted. (e.g a
P100,000 bond redeemable at 102 = P102,000).
 1.Term Bonds (single maturity date)
2. Serial Bonds (series of maturity date)
3.Secured Bonds (Mortgage bonds, Collateral trust bonds)
4. Unsecured Bonds (Debenture bonds)
5.Registered Bonds (registration of bondholders)

Types of Bonds 6. Coupon/Bearer Bonds (no registration of bondholders)

7.Convertible Bonds (exchange for shares)
8. Callable Bonds (called/redeemed before maturity)
9.Guaranteed Bonds (w/ guarantor)
10. Junk Bonds (high-risk, high-yield)
11. Zero-coupon Bonds (No interest but only discount from
face amount)
 Bond Valuation (Purchase Price of
Bond)
• A bondholder/investor may purchase a bond to earn interest. Such purchase price may
either be:
⚬ At Face Value
⚬ Above Face Value
⚬ Below Face Value

• At Face Value
⚬ Purchase Price = Face Value
⚬ The investor will receive interest and the bond issuer will pay interest equal to the
nominal or stated Interest rate.
Bond Premium and Bond Discount
Bond Premium
When the bonds are purchased at an
amount higher than the face value of the
bond. It is said to be bought at a Premium.
Bond Premium= Purchase Price – Face
Amount
Bond Discount
When the bonds are purchased at an
amount lower than the face value of the
bond. It is said to be bought at a Discount.
Bond Discount= Face Amount – Purchase
Price
 A financial metric that measures the expected annual
return of a fixed-interest investment, such as a bond or
CURRENT stock. It's also known as the bond yield or dividend
yield.

YIELD
Current Yield (%) = Annual Coupon / Bond Price

Bond YIELD TO
A calculation of the total return of a bond
based off of the purchase price, the par

Yields
value, and how much will be received in

CALL (YTC) coupon payments until the call date.

YIELDS TO The overall interest rate earned by an

investor who buys a bond at the market
MATURITY price and holds it until maturity.

(YTM)
 Issue Price or Purchase Price
of the Bonds
• PV of Bonds Payable + PV of the Total Interest Payments
• Accrued Interest is added if the bonds were acquired between interest
dates.
• When discounting, use Effective Rate / Yield Rate / Market Rate
Example 1
A P400,000, 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 to yield(1) 4%, (2) 8%.
b. Determine the premium or discount in each situation in (a)
c. If the bond is redeemable at 110%, find the value and the premium of the bond to
yield 4%.

Solution. F or R = P400,000.00; t = 15 years; m = 2; n = t x m = 15 x 2 = 30

 Bond Valuation (Carrying Value
or Book Value)
• The book value of a bond at any given time is the sum invested in the
bond or the outstanding liability at that time.
• The book value of a bond on the date of purchase is the purchase price.
• The book value on the redemption date is the redemption value.
• Bond / Investment Schedule
⚬ Schedule showing the Interest expense and payments, changes in
the carrying value, and the carrying value or book value of the
bond.
 Bond Ratings
• Quality ratings that reflect their probability of going into default.
• The three major rating agencies are:
⚬ Moody’s Investors Service(Moody’s)
⚬ Standard & Poor’s Corporation (S&P)
⚬ Fitch Investor’s Service
 Junk Bond
• A high-risk, high-yield bond.
• Double-B and lower bonds are speculative, or junk, bonds; and they
have a significant probability of going into default.
 Presented by Jomarie Acabal & Ronel Paradero

Thank you very

much!