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
