Activity 5 – Bond Valuation

Essay
Rubrics: A total of 10 points each. 8 points for content; 2 points for construction
a. As an investor, what do you think is the advantage of purchasing a bond over purchasing a stock?
b. What risk appetite best suits the characteristic of a bond? Why?
c. If the required return on a bond differs from its coupon interest rate, describe the behavior of the bond value
over time as the bond moves toward maturity.
d. Describe the two factors that affect the bond’s riskiness. Why do investors need to know it?

Problems
Note: Do not round off the present value factor once computed in the calculator. Final answers at 2 decimal places.

Problem A
PCOR issued a 10-year bond with 6% yield to maturity and 4% coupon interest rate. If the par value of the bond is P2,000,
compute the following
a. Bond price today
b. Bond price on the 5th year
c. Bond price on maturity date

Problem B
You intend to purchase a 10-year, P1,000 face value bond that pays interest of P60 semi-annually. If the nominal annual
required rate of return is 10%, how much should you be willing to pay for this bond?

Problem C
An conservative investor wish to purchase a 20-year bond that has a maturity value of P1,000 and receives a semiannual
interest of P40. If you require a 10% nominal yield to maturity on this investment, what is the maximum price you should be
willing to spend for the purchase of this bond?

Problem D
A 12-year corporate bond pays an annual coupon of 8.5%. The bond has a yield to maturity of 9.5% and a face value of
P1,000. What is the bond’s current yield?

Problem E
A P5,000 par value bond with an 8 percent coupon interest rate that currently sells for P4,750. What would be the current
yield of this bond?

Problem F
You have just purchased a 8-year bond with a par value of P1,500 for P1,420. Its annual coupon payment is P50. Determine
the bond’s yield to maturity.

Problem G
A treasury bond matures in 12 years and pays an 8 percent annual coupon. The bond has a face value of P1,000 and
currently sells for P985.
a. What is the bond’s current yield?
b. What is the bond’s yield to maturity?

Problem H
The SMC bonds currently sell for P2,300. They pay a P100 annual coupon, have a 10-year maturity, and a par value of
P2,500, but they can be called in 3 years at P2,200. What is the YTC?

Problem I
A 15-year bond with a 10 percent semiannual coupon and a $1,000 face value has a nominal yield to maturity of 7.5 percent.
The bond, which may be called after five years, has a nominal yield to call of 5.54 percent. What is the bond’s price today?
Problem J
The PAL bonds pays a P300 annual coupon for the 15-year maturity. The bond was originally issued at P2,000. An investor
holding this bond, now, has a capital gains of 20%.

a. What is the price of the bond today?

b. What is the current yield?
c. What is the Expected total return of the bond?

Problems – PRACTICAL APPLICATION

Alongside with this PDF is a Excel file (A5 Topic 5 - Bond Valuation - Excel Exercise). On the first sheet of the excel, you will
see how to compute the Bond Price if the Coupon payment is either annual or semi-annual. The values on that sheet is from
the lecture handout – Value of the bond example.

Exercise: Compute the Bond Price using the excel file given for PROBLEMS A, B, and C. Use the first sheet as a guide. Put your
computation and answer on the corresponding Sheets.