OMELEC 4 - BONDS AND THEIR VALUATION.pptx

Basic Bonds and their Valuation

1. BONDS AND THEIR VALUATION - RIZZA M. SOLIVEN

2. BONDS Financial Instruments that represents a loan made by an INVESTOR to a BORROWER In short para siyang promissory note or “Utang” Sa mas malalim na discussion ang “Bonds” ay “Securities” parang shares of stock na pwede ibenta sa market at a discounted price na kasi may “possibility” parin na hindi mabayaran kasi nga “utang” kaya hindi siya one is to one The “Value” of bonds changes depending on the conditions of the market like the stock market or stocks sa Philippine Stocks Exchange (PSE) Two Famous Types in the Philippines Government Bonds – Bonds issued by the Government for public service, project, infrastructure, etc. Corporate Bonds – Bonds issued by Corporations for Expansion, Upgrade, etc.

3. KEY CHARACTERISTICS OF BONDS Date of Issuance – Date when the Bond was ISSUED Par Value – Face value of the Bond Kung mag kano ung inutang Coupon Interest Rate – Interest Rate of the Loan (Fixed or Not) Interest Rate (quarter/semi-annual/annual) x Par Value = Interest Due Par Value + [Interest Due x (no. of years/months/period)] = Total Value of the Bond Maturity Date – Date when the Bond will be PAID Yield to Maturity (Promised Yield) – Rate of Return earned on a bond held to Maturity Yield to Call – Provision in the Bond that states that the Bond Issuer can “call back” the bond to be paid by the Lender after certain conditions (inflation)

4. COUPON RATES There are different types of Coupon Rates in Bonds: Fixed – Does not Change (usually sa corporate bonds) Market Dependent – Changes depending on the market rate (usually sa government bonds) Annual, Semi-Annual, Quarterly earnings – The term depends on the bond Bond prices varies inversely with interest rates works. When interest rates go up, bond prices fall in order to have the effect of equalizing the interest rate on the bond with prevailing rates, and vice versa. In simple terms, pag tumaas interest rates sa market bumababa value ng bonds vice versa.. Ang point ng concept na ito ay imaintain ung value nung bonds as much as possible

5. Yield to Call (YTC) This is a provision in the Bond that allows the Issuer to “Call Back” the bond even before its maturity date Ang general rule kasi sa bonds, babayaran lang ung bond or ung utang sa maturity date pero kung may “call provision” pwede siya bayaran agad ni Issuer depende sa “call schedule” na nakalagay sa mismong bond This is an OPTIONAL provision because Issuers are willing to PAY MORE , and Lenders will require MORE (coupon rates or higher interest rates or a “Call Price” or premium) Reasons of getting this provision Issuer can refund if the rates decline (Inflation) (discussed in the video)

6. Yield to Maturity Total return anticipated on a bond if the bond is held until the end of its lifetime In short the Principal Amount plus the Interest, ung computation ng interest medjo mahirap at complicado depende sa terms ng bond at other provisions like call provision or sinking provision etc.

7. Final Notes Ang “bonds” ay isang special form ng pag utang dahil ito ay nireregulate ng gobyerno Although pwede mo hawakan ung “bonds” hanggang maturity date pero para din siyang shares of stock na pag tumaas ung value pwede mo siya ibenta sa market through a broker para matangap mo agad ung ROI or Return of Investment mo on the bonds The YTM or YTC is greatly affected by the prevailing rates on the market and during inflation you may want to sell your bonds earlier You need to dedicate your time, effort, and knowledge if you want to invest in bonds Bonds is a nice way of diversifying your income

8. REFERENCE https://www.investopedia.com/terms/b/bond.asp https://home.csulb.edu/~pammerma/fin300/ffm908.ppt from California State University (Long Beach) https://www.youtube.com/watch?v=aevMEYoXOJg