BONDS

Theories

1. These bonds are issued to purchase specified real estate assets, and the acquired assets
served as collateral. ANS: Mortgage Bonds
2. These bonsd are supported by the assets the bonds financed. ANS: Revenue Bonds
3. Debt issued in a series so that some of the bonds periodically mature. ANS: Serial
Bonds
4. Bond sold in a foreign country but denominated inn the currency of the issuer. ANS:
Eurobond
5. True or False. Bond prices and changes in a market interest are inversely related. ANS:
TRUE

Problems

1. Jhannia issues a 5% bond with a maturty date of 20 years. 5 years have passed and the
bond is selling for P765:

a) What is the bond’s current yield?

ANS: 6.535948%
SOLUTION: 50/765

b) What is the yield to maturity?

ANS: 7.694494%

1  (1  x) 15
SOLUTION: 765 = 1,000(1+x)-15 + 50 ( )
x
x = 7.694494%
2. What is the yield to maturity if youo buy a zero coupon bond for P700 and it is
redeemed after 8 years for P1,200?
ANS: 6.969607%

SOLUTION: 700  1,200(1  x) 8

x = 6.969607%

3. ABC Bond has a current proce of P800, a maturity value of P1,000 and matures in 5
years. If interest is paid quarterly and the bond is priced to yield 8%, what is the bond’s
annual coupon rate?
ANS: 3.107462%

 20 1  (1.02) 20
SOLUTION: 800  1,000(1.02)  x( )
.02
x = 7.768656375

(7.768656375)( 4)
Coupon rate: (100) = 3.107462%
1,000

4. A bond with 15 years to maturity has a semiannual interest payment of P40. If the bond
sells for its par value, find:
a) The yield to maturity
ANS: 8%

1  (1  x) 30
SOLUTION: 1,000  1,000(1  x) 30  40( )
x
x = 8%

b) The current yield

ANS: 8%
80
SOLUTION: (100)  8%
1,000
5. A bond with maturity of 10 years and pays annual interest of P50 sells for its face value.
How much is you gain (loss) if, after two years, the yield on comparable preferred stock
is 9%?
ANS: (P221.39)

1  (1  x) 8
SOLUTION: 1,000(1  x) 8  50( ) = 778.61
x
778.61 - 1,000 = (221.39)

6. XYZ bond pays a 5% annual coupon interest for 8 years.

a) What is the price of the bond if the market interest rate is 10%?
ANS: P733.25

1  1.108
SOLUTION: 1,000(1.10) 8  50( ) = 733.25
.10
b) If the bond sells for P850, what is the current yield?
ANS: 5.882353%
50
SOLUTION: = 5.882353%
850
c) What will be the price of the bond if, after 5 years have elapsed, interest rate
becomes 11%?
ANS: P873.50

1  (1.11) 3
SOLUTION: 1,000(1.11) 3  50( ) = 873.50
.11

7. A bond currently selling for P750 pays an annual dividend of P30. How long is the
maturity of the bond if the market interest rate is 10%?
ANS: 4.635 years

1  1.10 x
SOLUTION: 750  1,000(1.10)  x  30( )
.10
 x = 4.635 years

8. MNO bond pays an 8% annual interest for 10 years.

a) What is the price of the bond if the interest rate is 10%?

ANS: P877.11

1  (1.10) 10
SOLUTION: 1,000(1.10) 10  80( ) = 877.11
.10
b) What is the current yield if the bond currently sells for P800?
ANS: 10%
80
SOLUTION:  10%
800
c) What is the price of the bond if, after 7 years, the interest rate becomes 9%?
ANS: P974.69

1  (1.09) 3
SOLUTION: 1,000(1.09) 3  80( ) = 974.69
.09
9. How long is the maturity of a bond that currently sells for 1,225 and pays P60 annually
and a market interest rate of 4%?
ANS: 15.243 years

1  1.04 x
SOLUTION: 1,225  1,000(1.04)  x  60( )
.04