Untitled Quiz

Bond Definitions

• Bond: An interest-bearing security promising a stated amount at maturity and regular interest payments (coupons).

Coupon

• Coupon: Periodic interest payments bondholders receive between the purchase and maturity dates, typically semi-annually.

Coupon Rate

• Coupon Rate: The rate per coupon payment period, denoted by 'r'.

Price of a Bond

• Price of a Bond: The bond's purchase price, denoted by 'P'.

Par Value/Face Value

• Par Value/Face Value: The amount payable at maturity, denoted by 'F'.
  • If P = F, the bond is purchased at par.
  • If P < F, the bond is purchased at a discount.
  • If P > F, the bond is purchased at a premium.

Term of a Bond

• Term of a Bond: The fixed period in years the bond is redeemable, as specified in the certificate. This is the number of years from purchase to maturity.

Fair Price of a Bond

• Fair Price of a Bond: The present value of all cash inflows to the bondholder.

Example Calculations

• Example 1 (Semi-annual Coupon):
  • Face Value (F) = ₱300,000
  • Coupon rate (r) = 10%
  • Semi-annual coupon amount = F * (1/2) = ₱15,000
• Example 2 (Fair Price):
  • Face Value (F) = ₱100,000
  • Maturity date = 10 years from now
  • Coupon rate = 5% payable semi-annually
  • Annual market rate = 4%
  • Calculate the fair price using present value formulas.

Formulas

• Semi-annual Coupon: (Face Value)(1/2)
• Annual Coupon: (Face Value)(r)
• Fair Price:
  • First: P = F / (1 + j)ⁿ
  • Second: (1 + r)¹ = (1 + j)^m
  • Final: P = R * [1 – (1 + j)^-n] / j

Additional Note

• The coupon rate is used to calculate the coupon amount, typically semi-annually, but not the rate at which money grows. Current market conditions affect the present value of future payments, not the coupon rate.