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Module 3

This document discusses bond valuation. It defines key terms like coupon rate, current yield, and yield to maturity. It provides examples of calculating these values for sample bonds. It also demonstrates how to calculate the present value of bonds given their face value, coupon payments, maturity date, and market required rate of return. The document shows how bond prices would change if market rates rose or fell.

Uploaded by

Ghillian Mae Guiang
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
48 views

Module 3

This document discusses bond valuation. It defines key terms like coupon rate, current yield, and yield to maturity. It provides examples of calculating these values for sample bonds. It also demonstrates how to calculate the present value of bonds given their face value, coupon payments, maturity date, and market required rate of return. The document shows how bond prices would change if market rates rose or fell.

Uploaded by

Ghillian Mae Guiang
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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BOND VALUATION

Module 3
Objectives

 To identify the difference of yield to maturity, coupon rate,


current yield
 To perform a computation of YTM, coupon rate, and current
yield
 To analyze the bond value based on the result of the computations
Bond Valuation and Its Importance

 Bond valuation is a technique for determining the


theoretical fair value of a particular bond.
 Elements of a bond:
 Maturity date
 Term
 Par value/maturity value/face value
 Interest rate
Bond Rates and Yields
 A bond currently sells for P9,329.00. It pays an annual coupon of
P700, has 10 years maturity period. It has a face value of P10,000.
What are its coupon rate, current yield, and yield to maturity
(YTM)?
 1. The coupon rate (or just “coupon”) is the annual coupon
divided by the face value of the bond
Coupon rate = P700 / P_____ = ___%
 2. The current yield is the annual coupon divided by the
current market price of the bond:
Current yield = P____ /_____ = 7.5%
 The yield to maturity or YTM
 P9,329.00 = P______ x[1 - 1/(1 + r)10]/r + $______ /(1 + r)10
The only way to find the YTM is trial and error:
a. Try 10%: P700 x[(1 - 1/(1.10)10]/.10 + P10,000/(1.10)10 = P8,160
b. Try 9%: P700x[1 - 1/(1.09)10]/.09 + P10,000/(1.09)10 = P8,720
c. Try 8%: P700x[1 - 1/(1.08)10]/.08 + P10,000/(1.08)10 = P9,330
( ) The yield to maturity is 8%
Valuing a Bond
 Assume you have the following information.
AdU bonds have a P10,000 face value with a promised annual coupon of
P1,000. Its maturity is in 20 years. The market’s required return on similar
bonds is 10%

 1. Calculate the present value of the face value


= P10,000 x [1/1.1020 ] = P10,000 x .14864 = P1,486.40
 2. Calculate the present value of the coupon payments
= P1,000 x [1 - (1/1.1020)]/.10 = P1,000 x 8.5136 = P8,513.60
 3. The present value of each bond = P1,486.40 + P8,513.60 = P10,000
Valuing a Bond
 Assume you have the following information.
AdU bonds have a P10,000 face value with a promised annual coupon of
P1,000. Its maturity is in 20 years. The market’s required return on similar
bonds is 12%

 1. Calculate the present value of the face value


= P10,000 [1/1.1220 ] = P10,000 x .10366 = P1,036.60
 2. Calculate the present value of the coupon payments
= P1,000 [1 - (1/1.1220)]/.12 = P1,000 x 7.4694 = P7,469.40
 3. The present value of each bond = P1,036.60 + 7,469.40 = P8,506.00
Valuing a Bond

 Assume you have the following information.


AdU bonds have a P10,000 face value with a promised annual coupon of
P1,000. Its maturity is in 20 years. The market’s required return on similar
bonds is 8%

 1. Calculate the present value of the face value


= P10,000 [1/1.0820 ] = P10,000 x .21455 = P2,145.50
 2. Calculate the present value of the coupon payments
= P1,000 [1 - (1/1.0820)]/.08 = P1,000 x 9.8181 = P9,818.10
 3. The present value of each bond = P2,145.50 + 9,818.10 = P11,963.60
Solution to Problem
 SMC issued SMC1 and SMC2 bonds with 4% and 10% coupon
respectively. Both have 10 years to maturity and P10,000 face
value, make semiannual payments with 9% YTMs. If market rates
rise by 2%, fall by 2%? Compute for the percentage price change
of the bonds.
Current Prices:
SMC1:
PV = P200 x [1 - 1/(1.045)20]/.045 + P10,000/(1.045)20
= P______
SMC2:
PV = P500 x [1 - 1/(1.045)20]/.045 + P10,000/(1.045)20
= P10,650.4O
Solution to Problem
Prices if market rates rise by 2%:
SMC1:
PV = P200 x [1 - 1/(1.055)20]/.055 + P10,000/(1.055)20
= P5,817.40

SMC2:
PV = P500 x [1 - 1/(1.055)20]/.055 + P10,000/(1.055)20
= P______
Prices if market rates fall by 2%:
SMC1:
PV = P200 x [1 - 1/(1.035)20]/.035 + P10,000/(1.035)20
= P7,868.20
SMC2:
PV = P500 x [1 - 1/(1.035)20]/.035 + P10,000/(1.035)20
= P12,131.90
 Percentage Changes in Bond Prices
Bond Prices and Market Rates
7% 9% 11%
_________________________________
SMC1 P7,868.14 P6,748.22 P5,817.37
% chg. (+16.60%) (___%)
SMC2 P12,131.86 P10,650.40 P9,402.48
% chg. (___%) (-11.72%)
_________________________________
References:

 Brigham and Huston. 2016. Fundamentals of Financial Management.


 Wahlen, J., Baginski, S., and Bradshaw, M. 2015. Financial Reporting, Financial
Statement Analysis, and Valuation.
 Brooks, Raymond. 2016. Financial Management: Core Concepts
 Pandey, I. M. 2015. Financial management
 Alexander, J. 2018. Financial Planning and Analysis and Performance Management.
 Financial Reproting and Analysis, Charles Gibson

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