Part 3:

Fixed Income Securities

Chapter 9
Bond Prices and yields

JOUHARA G. SAN JUAN DR. V.V. SALENTES

DBA Student Professor Lecturer
 What is Bond?
• Bonds are long-term debt securities that are
issued by corporations and government
entities. Purchasers of bonds receive periodic
interest payments, called coupon payments,
until maturity at which time they receive the
face value of the bond and the last coupon
payment. Most bonds pay interest semi-
annually. The Bond Indenture or Loan
Contract specifies the features of the bond
issue. The following terms are used to describe
bonds.
 Key Terms
• Par or Face Value-The par or face value of a bond is the
amount of money that is paid to the bondholders at maturity.
– BytheProf.
For most bonds amount Simple
is P 1000.
Simply It also
TM
generally
represents the amount of money borrowed by the bond
issuer.
• Coupon Rate-The coupon rate, which is generally fixed,
determines the periodic coupon or interest payments. It is
expressed as a percentage of the bond's face value. It also
represents the interest cost of the bond issue to the issuer.
• Coupon Payments-The coupon payments represent the
periodic interest payments from the bond issuer to the
bondholder. The annual coupon payment is calculated be
multiplying the coupon rate by the bond's face value. Since
most bonds pay interest semi-annually, generally one half of
the annual coupon is paid to the bondholders every six
months.
 Cont…Key Terms
• Maturity Date-The maturity date represents the date on
which the bond matures, i.e., the date on which the face
value is repaid. The last coupon payment is also paid on the
maturity date.
• Original Maturity-The time remaining until the maturity date
when the bond was issued.
• Remaining Maturity-The time currently remaining until the
maturity date.
• Required Return-The rate of return that investors currently
require on a bond.
• Yield to Maturity-The rate of return that an investor would
earn if he bought the bond at its current market price and
held it until maturity. Alternatively, it represents the discount
rate which equates the discounted value of a bond's future
cash flows to its current market price.
Illustration: CONCEPT OF BONDS
The box below illustrates the cash flows for a semi-annual
coupon bond with a face value of P 1000, a 10% coupon rate,
and 15 years remaining until maturity. (Note that the annual
coupon is P 100 which is calculated by multiplying the 10%
coupon rate times the P 1000 face value. Thus, the periodic
coupon payments equal P 50 every six months.)
How do you value a Bond?
Illustrative Problem
Example : Find the price of a
semi-annual coupon bond with
a face value of P 1,000, a 10%
coupon rate , and 15 years
remaining unto; maturity given
that the required return is 12%.
Bond Price
METHOD 1
• The price or value of a bond is determined by discounting the bond's
expected cash flows to the present using the appropriate discount rate.
This relationship is expressed for a semi-annual coupon bond by the
following formula:

where
B0 = the bond value,
C = the annual coupon payment,
F = the face value of the bond,
r = the required return on the bond, and
t = the number of years remaining until maturity.
Given:
Face Value of the Bonds P 1,000.00
Nominal Rate 10%
Effective Rate 12%
Semi-Annual Coupon Bond
15 Years Remaining unto maturity
 METHOD 2 Using the PV Factor through
Ordinary Calculator
Given: Solution:
Face Value of the Bonds P 1,000.00 PV of 1 at 12% for 15 periods (1,000x.1827) 182.70
Nominal Rate 10% PV of interest Payments( 100x 6.8109) 681.09
Effective Rate 12% Total Present Value 863.79
Semi-Annual Coupon Bond
15 Years Remaining unto maturity

The PV of 1 at 12% for 15 periods and the PV of an ordinary

annuity of 1 at 12% for 15 periods can be determined through the
used of an ordinary calculator.
1. Enter 1.12
2. Press the division sign ( ÷) twice.
3. Press the equal sign (=) 𝒇𝒐𝒓 𝒕𝒉𝒆 𝒏𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒑𝒆𝒓𝒊𝒐𝒅𝒔 𝒓𝒆𝒒𝒖𝒊𝒓𝒆𝒅. 𝑷𝒓𝒆𝒔𝒔 once
for one period , press twice for two periods and so on. In this case, press 15 times because
there are 15 interest periods..
4. The result is the PV of 1 at 12% for 15 periods or 0.1827
5. Deduct 1.00 from the result in number 4. The result is 0.8173 negative
6. Press the plus/minus sign (±) 𝒕𝒐 𝒓𝒆𝒎𝒐𝒗𝒆 𝒕𝒉𝒆 𝒏𝒆𝒈𝒂𝒕𝒊𝒗𝒆 𝒊𝒏 𝒏𝒖𝒎𝒃𝒆𝒓 𝟓.
7. Divide the result in No 6 by .12
8. The result is the PV of an ordinary annuity of 1 at 12% for 15 periods or 6.8109
 METHOD 3 Using the PV Table
Given: Solution:
Face Value of the Bonds P 1,000.00 PV of 1 at 12% for 15 periods (1,000x.1827) 182.70
Nominal Rate 10% PV of interest Payments( 100x 6.8109) 681.09
Effective Rate 12% Total Present Value 863.79
Semi-Annual Coupon Bond
15 Years Remaining unto maturity

n
Present Value of 1 Table
1% 2% 3% 4% 5% 6% 8% 10% 12%
1 0.9901 0.9804 0.9709 0.9615 0.9524 0.9434 0.9259 0.9091 0.8929
2 0.9803 0.9612 0.9426 0.9246 0.907 0.89 0.8573 0.8265 0.7972
3 0.9706 0.9423 0.9151 0.889 0.8638 0.8396 0.7938 0.7513 0.7118
4 0.961 0.9239 0.8885 0.8548 0.8227 0.7921 0.735 0.683 0.6355
5 0.9515 0.9057 0.8626 0.8219 0.7835 0.7473 0.6806 0.6209 0.5674
6 0.9421 0.888 0.8375 0.7903 0.7462 0.705 0.6302 0.5645 0.5066
7 0.9327 0.8706 0.8131 0.7599 0.7107 0.6651 0.5835 0.5132 0.4524
8 0.9235 0.8535 0.7894 0.7307 0.6768 0.6274 0.5403 0.4665 0.4039
9 0.9143 0.8368 0.7664 0.7026 0.6446 0.5919 0.5003 0.4241 0.3606
10 0.9053 0.8204 0.7441 0.6756 0.6139 0.5584 0.4632 0.3855 0.322
11 0.8963 0.8043 0.7224 0.6496 0.5847 0.5268 0.4289 0.3505 0.2875
12 0.8875 0.7885 0.7014 0.6246 0.5568 0.497 0.3971 0.3186 0.2567
13 0.8787 0.773 0.681 0.6006 0.5303 0.4688 0.3677 0.2897 0.2292
14 0.87 0.7579 0.6611 0.5775 0.5051 0.4423 0.3405 0.2633 0.2046
15 0.8614 0.743 0.6419 0.5553 0.481 0.4173 0.3152 0.2394 0.1827
 Rate Table For the Present Value of
an Ordinary Annuity of 1
n 1% 2% 3% 4% 5% 6% 8% 10% 12%
1 0.9901 0.9804 0.9709 0.9615 0.9524 0.9434 0.9259 0.9091 0.8929
2 1.9704 1.9416 1.9135 1.8861 1.8594 1.8334 1.7833 1.7355 1.6906
3 2.941 2.8839 2.8286 2.7751 2.7233 2.673 2.5771 2.4869 2.4018
4 3.902 3.8077 3.7171 3.6299 3.546 3.4651 3.3121 3.1699 3.0374
5 4.8534 4.7135 4.5797 4.4518 4.3295 4.2124 3.9927 3.7908 3.6048
6 5.7955 5.6014 5.4172 5.2421 5.0757 4.9173 4.6229 4.3553 4.1114
7 6.7282 6.472 6.2303 6.0021 5.7864 5.5824 5.2064 4.8684 4.5638
8 7.6517 7.3255 7.0197 6.7327 6.4632 6.2098 5.7466 5.3349 4.9676
9 8.566 8.1622 7.7861 7.4353 7.1078 6.8017 6.2469 5.759 5.3283
10 9.4713 8.9826 8.5302 8.1109 7.7217 7.3601 6.7101 6.1446 5.6502
11 10.3676 9.7869 9.2526 8.7605 8.3064 7.8869 7.139 6.4951 5.9377
12 11.2551 10.5753 9.954 9.3851 8.8633 8.3838 7.5361 6.8137 6.1944
13 12.1337 11.3484 10.635 9.9857 9.3936 8.8527 7.9038 7.1034 6.4236
14 13.0037 12.1063 11.2961 10.5631 9.8986 9.295 8.2442 7.3667 6.6282
15 13.8651 12.8493 11.938 11.1184 10.3797 9.7123 8.5595 7.6061 6.8109
 Par, Premium and Discount Bond
Par Bonds-A bond is considered to be a par bond when
its price equals its face value. This will occur when the
coupon rate equals the required return on the bond.

Premium Bonds-A bond is considered to be a premium

bond when its price is greater than its face value. This
will occur when the coupon rate is greater than the
required return on the bond.

Discount Bonds-A bond is considered to be a discount

bond when its price is less than its face value. This will
occur when the coupon rate is less than the required
return on the bond.
 Illustration:
Find the value for the semi-annual coupon bond with the following features
Bond Selling At . . .
PREMIUM PAR DISCOUNT
Satisfies This Nominal Rate > Nominal Rate= Nominal Rate <
Condition Effective Rate Effective Rate Effective Rate

Face Value P 1,000.00 P 1,000.00 P 1,000.00

Nominal Rate 10 % 10% 10%

Par/Gain/Loss P (172.92) P 0.00 P 137.65

Years to Maturity 15 15 15
remaining
Effective Rate 8% 10% 12%
(Assumption)

Bond Price ??? P 1,172.92 P 1,000.00 P 862.35

Yield to Maturity
The yield to maturity on a bond is the rate of return that an investor would
earn if he bought the bond at its current market price and held it until
maturity. It represents the discount rate which equates the discounted value
of a bond's future cash flows to its current market price.
This is illustrated by the following equation:
where
B0 = the bond price,
C = the annual coupon payment,
F = the face value of the bond,
YTM = the yield to maturity on the bond, and
t = the number of years remaining until maturity.
Note: The yield to maturity usually cannot be solved for directly. It generally
must be determined using trial and error or an iterative technique.
Fortunately, financial calculators make the task of solving for the yield to
maturity quite simple.
Illustration:
Find the yield to maturity on a semi-annual coupon bond with the following features

Bond Selling At . . .
PREMIUM PAR DISCOUNT
Satisfies This Condition Nominal Rate/Coupon Nominal Rate/Coupon Nominal Rate/Coupon
Rate > YTM Rate = YTM Rate < YTM

Bond Price
P 1,172.92 P 1,000.00 P 862.35
Face Value P 1,000.00 P 1,000.00 P 1,000.00

Nominal Rate/Coupon 10 % 10% 10%

Rate (P 100 coupon
payment per annum)
Par/Gain/Loss P (172.92) P 0.00 P 137.65

Years to Maturity 15 15 15
remaining

Effective Rate/Yield to 8% 10% 12%

Maturity ???
***Thank You and God Bless***