15/06/2022

Interest Rates

RECAP
True or False
MCQs

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2 pts
Bond is a long-term contract which provides that the holder
of this instrument will receive coupon payment, each year
until its maturity date and principal payment, on the said
maturity date.

TRUE
Bond is a long-term contract which provides that the holder
of this instrument will receive coupon payment, each year
until its maturity date and principal payment, on the said
maturity date.

2
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2 pts
A bond that is issued by a foreign corporation is a foreign
bond which is subject to default risk.

TRUE
A bond that is issued by a foreign corporation is a foreign
bond which is subject to default risk.

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2 pts
If the coupon interest rate (nominal rate) is greater than yield
to maturity (YTM), the bond is priced lower than face value.

FALSE
If the coupon interest rate (nominal rate) is greater than yield
to maturity (YTM), the bond is priced lower than face value.

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2 pts
The yield to maturity (YTM) is the rate of return the investor
will receive if he intends to hold the bond until it matures
irrespective of the increase or decrease in the market rates.

TRUE
The yield to maturity (YTM) is the rate of return the investor
will receive if he intends to hold the bond until it matures
irrespective of the increase or decrease in the market rates.

10

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2 pts
The yield to call is the rate of return earned on a bond when it
is called before its maturity date.

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TRUE
The yield to call is the rate of return earned on a bond when it
is called before its maturity date.

12

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2 pts
This is a kind of bond that is exchangeable at the option of
the bondholder for the issuing company’s common stock?
a. Bond with put provision
b. Bond with warrant
c. Callable bond
d. Convertible bond

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D
This is a kind of bond that is exchangeable at the option of
the bondholder for the issuing company’s common stock?
a. Bond with put provision
b. Bond with warrant
c. Callable bond
d. Convertible bond

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2 pts
If the YTM is greater than the coupon or stated interest rate:
a. The bond is issued at a premium
b. The bond is issued at a discount
c. The bond price will not change as it reaches its maturity
d. The bond price decreases as it reaches maturity

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B
If the YTM is greater than the coupon or stated interest rate:
a. The bond is issued at a premium
b. The bond is issued at a discount
c. The bond price will not change as it reaches its maturity
d. The bond price decreases as it reaches maturity

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8
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2 pts
A 10-year corporate bond has an annual coupon payment of
9%. The bond is currently selling at par (P1,000). Which of the
following statements is correct?
a. The bond’s yield to maturity is 9%
b. The bond’s current yield is 9%
c. If the bond’s yield to maturity remains constant, the
bond’s price will remain at par
d. All of the statements above are correct

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D
A 10-year corporate bond has an annual coupon payment of
9%. The bond is currently selling at par (P1,000). Which of the
following statements is correct?
a. The bond’s yield to maturity is 9%
b. The bond’s current yield is 9%
c. If the bond’s yield to maturity remains constant, the
bond’s price will remain at par
d. All of the statements above are correct

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9
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2 pts
Issuing company generally will exercise its rights to call the
bonds when the interest rates in the market?
a. Remain the same
b. Increase
c. Decrease
d. No correlation between interest and call provision

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C
Issuing company generally will exercise its rights to call the
bonds when the interest rates in the market?
a. Remain the same
b. Increase
c. Decrease
d. No correlation between interest and call provision

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2 pts
If the bond’s YTM is higher than the nominal interest rate, the
price will _________, as it reaches the maturity”
a. Remain the same
b. Increase
c. Decline
d. No correlation between price and maturity

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B
If the bond’s YTM is higher than the nominal interest rate, the
price will _________, as it reaches the maturity”
a. Remain the same
b. Increase
c. Decline
d. No correlation between price and maturity

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Interest Rates
• Are essential as they are commonly used as benchmark for
other types of securities in determining an acceptable level
of required return.
• Depict certain macroeconomic factors.

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• Also known as stated or coupon rate

• The interest rate used to compute the
Nominal interest payment received by the investors
Interest Rate from debt securities
• The interest payment does not consider
compounding effect

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• The cost of source of financing that considers

simple interest.

Annual APR =
Percentage
Rate (APR) I – Interest amount
P – Principal
T – Time period

25

ATC issued 100 bond certificates with P1,000

Problem 1: face value each. The total interest of P3,000 is
payable semi-annually. What is the APR of
interest and coupon rate?

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ATC issued 100 bond certificates with P1,000

face value each. The total interest of P3,000 is
payable semi-annually. What is the APR of
interest and coupon rate?

APR =
Problem 1:
,
APR = ( , ) /

APR = ?

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ATC issued 100 bond certificates with P1,000

face value each. The total interest of P3,000 is
payable semi-annually. What is the APR of
interest and coupon rate?

APR =
Problem 1:
,
APR =
( , ) /

APR = 6%

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• Also known as discount rate

Effective • The interest rate used to compute the
present value factors
Interest Rate • The interest payment consider compounding
effect

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• The cost of source of fund that considers the

effect of compounding.
• Effective annual rate
Annual APY or EAR or Eff% = {[1 + ] 𝑚 – 1}
Percentage
Yield (APY) APY – Annual Percentage Yield
i – Nominal interest rate per year
m – number of compounding periods within a
year

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ABC Company borrowed P200,000 for 180-day

period. The firm will repay the P200,000
principal amount and P6,000 interest. What is
the APY considering the compounding effect?

APR =
Problem 2:
,
APR =
, /

APR = ?

31

ABC Company borrowed P200,000 for 180-day

period. The firm will repay the P200,000
principal amount and P6,000 interest. What is
the APY considering the compounding effect?

APR =
Problem 2:
,
APR =
, /

APR = 6%

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ABC Company borrowed P200,000 for 180-day period.

The firm will repay the P200,000 principal amount and
P6,000 interest. What is the APY considering the
compounding effect?
APR = 6%

APY or EAR or Eff% = {[1 + ] 𝑚 – 1}

Problem 2: %
APY or EAR or Eff% = {[1 + ] 2 – 1}

APY or EAR or Eff% = {1.0609 – 1}

APY or EAR or Eff% = ?

33

ABC Company borrowed P200,000 for 180-day period.

The firm will repay the P200,000 principal amount and
P6,000 interest. What is the APY considering the
compounding effect?
APR = 6%

APY or EAR or Eff% = {[1 + ] 𝑚 – 1}

Problem 2: APY or EAR or Eff% = {[1 +

% 2
] – 1}

APY or EAR or Eff% = {1.0609 – 1}

APY or EAR or Eff% = 0.0609 or 6.09%

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• Real risk-free interest rate (r*)

Components • Risk-free interest rate (rf or r* + IP)
• Inflation premium (IP)
of Nominal • Default risk premium (DRP)
Interest Rates • Liquidity premium (LP)
• Market risk premium (MRP)

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