Exercise 1 – True or False

Name: ___________________________________________ Score: ________

Section: ________________________________

Instruction: Write T if the answer is True and F if the answer is False on the space provided for each
number.
_________ 1. The market value of any real or financial asset, including stocks, bonds, or art work
purchased in hope of selling it at a profit, may be estimated by determining future cash flows and then
discounting them back to the present.

Answer: True

_________ 2. A call provision gives bondholders the right to demand, or "call for," repayment of a bond.
Answer: False

_________ 3. There is an inverse relationship between bonds' quality ratings and their required rates of
return.

Answer: True

_________ 4. A zero-coupon bond is a bond that pays no interest and is offered (and initially sells) at par.
Answer: False

_________ 5. If the required rate of return on a bond (rd) is greater than its coupon interest rate and will
remain above that rate, then the market value of the bond will always be below its par value until the bond
matures, at which time its market value will equal its par value.
Answer: True

_________ 6. The current yield of a bond will equal its coupon rate when the bond is selling at par value.
Answer: True

_________ 7. The sensitivity of a bond's value to changing interest rates depends on both the bond's time
to maturity and its pattern of cash flows.
Answer: True

_________ 8. So long as a bond sells for an amount above its par value, the coupon interest rate and yield
to maturity remain equal.
Answer: False

_________ 9. As the maturity date of a bond approaches, the bond's market value approaches its par
value.
Answer: True

_________ 10. Shorter-term bonds have greater interest rate risk than do longer-term bonds.
Answer: False
_________ 11. The yield to maturity is the annualized discount rate that equates the future coupon and
principal payments to the initial proceeds received from the bond offering.
Answer: True

________ 12. Treasury bond dealers may trade Treasury bonds among themselves.
Answer: True

_________ 13. Under the STRIP program created by the Treasury, stripped securities are created and sold
by the Treasury.
Answer: False

_________ 14. Corporate bonds that receive a higher rating from credit rating agencies are normally
placed at lower yields.
Answer: True

_________ 15. A call provision on bonds normally allows the firm to sell new bonds at par value.
Answer: False

_________ 16. Bonds that are not secured by specific property are called debentures.
Answer: True

_________ 17. Assume that you purchased corporate bonds one year ago that have no protective
covenants. Today, it is announced that the firm that issued the bonds plans a leveraged buyout. The
market value of your bonds will likely rise as a result.
Answer: False

_________ 18. During weak economic periods, newly issued junk bonds require lower risk premiums
than in strong economic periods.
Answer: False

_________ 19. Zero-coupon bond corporate bonds have the most active secondary market.
Answer: False

_________ 20. If interest rates suddenly decline, those existing bonds that have a call feature are less
likely to be called.
Answer: False

_________ 21. Corporate bonds can be placed with investors through a public offering or a private
placement.
Answer: True

_________ 22. Corporate bonds are less standardized than stocks.

Answer: False

_________ 23. Bonds issued by large well-known corporations in large volume are liquid because most
buyers hold these bonds until maturity.
Answer: True

_________ 24. The primary investors in bond markets are institutional investors such as commercial
banks, bond mutual funds, pension funds, and insurance companies.
Answer: True
_________ 25. The key difference between a note and a bond is that note maturities are usually less than
one year, while bond maturities are one year or more.
Answer: False
Exercise 2 – Multiple Choice Concepts

Name: ___________________________________________ Score: ________

Section: ________________________________

Instruction: Encircle the letter that corresponds to your answer.

1. A(n)________ is used to outline the issuing company's contractual obligations to bondholders.
a. mortgage
b. debenture
c. bond rating
d. indenture

2. The yield to maturity on a bond:

a. is fixed in the indenture.
b. is lower for higher-risk bonds.
c. is the required return on the bond.
d. is generally equal to the coupon interest rate.

3. Which of the following events would make it more likely that a company would call its outstanding
callable bonds
a. The company’s bonds are downgraded.
b. Market interest rates rise sharply.
c. Market interest rates decline sharply.
d. The company's financial situation deteriorates significantly.

4. A 10-year corporate bond has an annual coupon of 9%. The bond is currently selling at par (P1,000).
Which of the following statements is CORRECT?
a. The bond’s expected capital gains yield is zero.
b. The bond’s yield to maturity is above 9%.
c. The bond’s current yield is above 9%.
d. If the bond’s yield to maturity declines, the bond will sell at a discount.

5. Which of the following statements is CORRECT?

a. A zero-coupon bond's current yield is equal to its yield to maturity.
b. If a bond’s yield to maturity exceeds its coupon rate, the bond will sell at par.
c. All else equal, if a bond’s yield to maturity increases, its price will fall.
d. If a bond’s yield to maturity exceeds its coupon rate, the bond will sell at a premium over par.

6. A 15-year bond with a face value of P1,000 currently sells for P850. Which of the following
statements is CORRECT
a. The bond’s coupon rate exceeds its current yield.
b. The bond’s current yield exceeds its yield to maturity.
c. The bond’s yield to maturity is greater than its coupon rate.
d. The bond’s current yield is equal to its coupon rate.
7. Which of the following statements is CORRECT?
a. All else equal, high-coupon bonds have less reinvestment rate risk than low-coupon bonds.
b. All else equal, long-term bonds have less reinvestment rate risk than short-term bonds.
c. All else equal, low-coupon bonds have less interest rate price risk than high-coupon bonds.
d. All else equal, short-term bonds have less reinvestment rate risk than long-term bonds.

8. Which of the following is used as a discount rate used to value a bond?

a. the market rate of interest.
b. the coupon interest rate.
c. determined by the issuing company.
d. fixed for the life of the bond.

9. Which of the following bonds are most sensitive to interest rate movements?
a. no coupon and short-term maturity.
b. high coupons and short-term maturity.
c. high coupons and a long-term maturity.
d. no coupon and a long-term maturity.

10. Which of the following statements about convertible bonds is/are true?

I. bonds that may be converted to a certain number of shares of stock are determined by the
conversion ratio.
II. options attached to bonds that give the bondholder the right to purchase stock at a preset
price without giving up the bond.
III. bonds collateralized with certain types of automobiles.

a. I only
b. II only
c. III only
d. All are true
 Exercise 3 – Multiple Choice Concepts

Name: ___________________________________________ Score: ________

Section: ________________________________

Instruction: Encircle the letter that corresponds to your answer.

1. Which one of the following bonds is the riskiest investment?

a. AAA-rated non-callable corporate bond with a sinking fund
b. An AA-rated callable corporate bond with a sinking fund
c. AA-rated callable corporate bond without a sinking fund
d. An AAA-rated callable corporate bond with a sinking fund

2. Which of the following statements is/are true about callable bonds?

I. Must always be called at par

II. Will normally be called after interest rates drop
III. Have higher required returns than non-callable bonds

a. I and II only
b. I and III only
c. II and III only
d. All of them are correct

3. Which of the following statements about Eurobonds is/are true?

I. The issuer chooses the currency of denomination.

II. Spreads on firm commitment offers are lower for Eurobonds than for U.S. bonds.
III. Eurobonds are bearer bonds.

a. I and II only
b. I and III only
c. II and III
d. All are true

4. Which of the following statements about bearer bonds is/are true?

1. The registered owner automatically receives bond payments when scheduled

2. Coupons attached that are redeemable by whoever has the bond.
3. It matures on a series of dates.

a. I only
b. II only
c. III only
 d. All are true

5. It is a Treasury security in which periodic coupon interest payments can be separated from each other
and the principal payment.
a. T-bill.
b. T-bond.
c. STRIP.
d. Corporate bond.

6. Which of the following is correct regarding the price of the bond if the coupon rate equals the
required rate of return?
a. Equal to its par value.
b. Above its par value.
c. Below its par value.
d. Cannot be determined

8. The higher the investor's required rate of return about the coupon rate, the
a. smaller is the premium on the price.
b. smaller is the discount on the price.
c. greater is the premium on the price.
d. greater is the discount on the price.

7. About the prices of bonds, which among the following are most sensitive to interest rate movements?
a. small coupon payments
b. high coupon payments
c. zero-coupon payments
d. answer not given

8. Which of the following is correct with regards to the prices of short-term bonds as compared to long-
term bonds?
a. equally volatile as
b. less volatile than
c. more volatile than
d. depends on the duration

9. As interest rates, and consequently investors' required rates of return, change over time, the ________
of outstanding bonds will also change.
a. maturity date
b. coupon interest payment
c. par value
d. price

10. Assume that all interest rates in the economy declined from 10% to 9%. Which of the following
bonds would have the largest percentage increase in price?
a. An 8-year bond with a 9% coupon.
b. A 1-year bond with a 15% coupon.
c. A 3-year bond with a 10% coupon.
d. A 10-year zero-coupon bond.
 Exercise 4 – Multiple Choice - Problems

Name: ___________________________________________ Score: ________

Section: ________________________________

Instruction: Encircle the letter that corresponds to your answer.

1.SCP Corporation would like to purchase a bond that has a par value of P1,000, pays P80 at the end of
each year in coupon payments, and has 10 years remaining until maturity. If the prevailing annualized
yield on other bonds with similar characteristics is 7.5 percent, how much will SCP pay for the bond?
a. P1,000.00
b. P1,034.32
c. P1,050.97
d. Answer not given

Answer
VB = FV(1 + i)-n + CP 1 – (1 + i)-n
i

= P1,000(1.075)-10 + P80 1-(1.075)-10

0.75
= P1,034.32

2.Maja just purchased a P1,000 par value bond with a 10 percent annual coupon rate and a life of 20 years.
The bond has four years remaining until maturity, and the yield to maturity is 12 percent. How much
did Maja pay for the bond?
a. P850.61
b. P939.25
c. P1,000.00
d. P1,170.27

Answer
VB = FV(1 + i)-n + CP 1 – (1 + i)-n
i

= P1,000(1.12)-4 + P100 1-(1.12)-4

0.12

= P939.25

3.Bea would like to purchase a bond that has a par value of P1,000. The coupon rate is 10 percent per
annum and pays interest semi-annually. The bond has three years remaining until maturity. If the
prevailing annualized yield on other bonds with similar characteristics is 12 percent, how much will
Stephanie pay for the bond?
 a. P712.20
b. P917.77
c. P950.83
d. P951.96
Answer
VB = FV(1 + i)-n + CP 1 – (1 + i)-n
i

= P1,000(1.06)-6 + 50 1 – (1.06)-6
0.06

= P950.83

4.SGPT Corp. recently purchased corporate bonds in the secondary market with a par value of P10,000,000
a coupon rate of 12 percent (with annual coupon payments), and four years until maturity. If SGPT
intends to sell the bonds in two years and expects investors' required rate of return on similar
investments to be 10 percent at that time, what is the expected market value of the bonds in two years?
a. P9,661,989.80
b. P10,000,000.00
c. P10,347,107.44
d. P10,633,973.09

Answer
VB = FV(1 + i)-n + CP 1 – (1 + i)-n
i
= P10,000,000(1.10)-2 + P1,200,000 1 – (1.10)-2
0.10
= P10,347,107.44

5.Assume a bond with a P1,000 par value and a 12 percent coupon rate, two years remaining to maturity,
and a 10 percent yield to maturity. The modified duration of this bond is:
a. 1.58 years
b. 1.75 years
c. 1.89 years
d. 1.96 years.

Answer
Time Coupon
payment (1 + i)-n
1 P120 0.9091 P109.09 P109.09
2 P1,120 0.8264 925.57 1,851.14
P1,034.66 P1,960.23

Modified duration = P1,960.23/P1,034.66

= 1.89

6.A P1,000 par bond with five years to maturity is currently priced at P892. Annual interest payments are
P90. What is the yield to maturity? (Use the approximate yield to maturity)
a. 13 percent
b. 12 percent
 c. 11 percent
d. 10 percent

Answer
7.SUV Corp. has forecasted its bond portfolio value for one year ahead to be P25,600,000 million. In one
year, it expects to receive P2,500,000 in coupon payments. The bond portfolio today is worth
P25,250,000 million. What is the forecasted return of this bond portfolio?
a. 1.39%
b. 9.90%
c. 10.00%
d. 11.29%

Answer
Rate of return = P25,600,000 + P2,500,00 – P25,250,000 = 11.29%
P25,250,00

8.The T-note has a coupon rate of 0.625 percent and an asked yield of 0.853 percent. The remaining life of
the T-note is 8 years. What is the asked price on the t-note? (use semiannual compounding)?
a. 93.47%
b. 95.20%
c. 96.68%
d. 100.00%

Answer:
VB = FV(1 + i)-n + CP 1 – (1 + i)-n
i
= 100(1.004265) + 0.003125 1 – (1.004265)-16
-16

0.004265
= 93.4654%

9.A bond has a P1,000 par value and an 8 percent coupon rate. The bond has four years remaining to
maturity and a 10 percent yield to maturity. This bond's modified duration is ____ years.
a. 1.32
b. 3.34
c. 3.56
d. Answer not given

Answer
Time Coupon
payment (1 + i)-n
1 P80 0.9091 P72.728 P 72.728
2 P80 0.8264 66.112 132.224
3 P80 0.7513 60.104 180.312
4 P1,080 0.6830 737.64 2,950.56
P936.58 P3,335.824
4

Modified duration = P3,335.824/P936.584 = 3.56 years

10. Philippine Insurance Company (PIC) owes P550,000 in eight years. To fund this outflow, PIC wishes to
buy STRIPS that mature in 10 years. The STRIPS have a P5,000 face value per STRIP and pay a 6
percent APR with semiannual compounding. How much must PIC spend now to fully fund the outflow?
a. P100,000.00
b. P304,521.66
c. P307,117.13
d. P739,154.01

Answer:
= 5,000(1.03)-20 × (550,000/5,000)

= P304,521.66
 Exercise 5 – Multiple Choice - Problems

Name: ___________________________________________ Score: ________

Section: ________________________________

Instruction: Encircle the letter that corresponds to your answer.

1.On June 1, 2021, ABC purchased a P10,000 par T-bonds that matures in ten years. The coupon rate is 8
percent and the price quote is 98-6. The last coupon payment was April 1, 2021, and the next payment
is October 1, 2021 (184 days total). What is the accrued interest? (Use 30 days in a month)
a. P133.33
b. P266.67
c. P400.00
d. P533.33

Answer:
Coupon payment = 10,000 x 8% x 6/12 = P400

Accrued interest = 400 x 2/6 = P133.33

2.APFM Corporation purchased a P10,000 par T-bond that matures in 12 years. The coupon rate is 6
percent and APFM bought the bond 90 days after the last coupon payment (90 days before the next).
The ask yield is 7 percent. What was the dirty price of the bond?
a. P9,295.45.
b. P9,313.75.
c. P9,347.08
d. P9,497.08

Answer:
VB = FV(1 + i)-n + CP 1 – (1 + i)-n
i
= P10,000(1.035)-24 + 300 1 – (1.035)-24
0.035
= P9,197.08

Accrued interest = P10,000 x 0.03 x 90/180

= P150

Dirty price = P9,197.08 + P150

= P9,347.08
3.ABC Corporation has a T-bond with a P1,000 par value. It is quoted at a bid of 105-9 and an ask of 105-
7. If ABC Corporation sells the T-bond, how much it will receive?
a. P1,052.81.
b. P1,052.19.
c. P1,057.22.
d. P1,059.22.
Answer:
105.9 is equal to 105 + 9/32 or 105.28125

Amount to be received = P1,000(105.28125)

= P1,052.81

4.Smart, Inc. has a P1,000 par value bond outstanding that was issued for 30 years 5 years ago at a coupon
rate of 15%. What is it yielding if it is selling for P938.81? (Use the approximate yield to maturity)
a. Between 10% and 12%
b. Between 12% and 14%
c. Between 14% and 16%
d. Between 16% and 18%

Answer
AYTM = CP + (FV – IP)
n
FV + IP
2

= 150 + (P1,000 – P938.81)

25
P1,000 + P938.81
2

= o.157258 or 15.73%

5.Mr. T is considering the purchase of an RFT bond with a 12% coupon rate. Interest is paid and
compounded semiannually. The bond will mature in 10 years and has a P1,000 face value. The bond
currently sells for P950. What is the annual yield to maturity for this bond? (Use the approximate yield
to maturity)
a. 12.00%
b. 12.56%
c. 12.82%
d. 13.34%

Answer
AYTM = CP + (FV – IP)
n x 2
FV + IP
2

= 60 + (P1,000 – P950)
20 x 2
P1,000 + P950
 2

= 0.06410 x 2

= 0.1282 or 12.82%

6.A P1000 par value convertible bond has a conversion price of P50. It is currently selling for P1,200, even
though the bond’s coupon rate and the market interest rate are equal. The common stock obtained upon
conversion is selling for P27 per share. What is the convertible bond’s conversion ratio?
a. 8.50
b. 20.00
c. 24.00
d. 100.00

Answer
P1,000/P50 = 20

7.ABC Corporation has a P1000 par value convertible bond with a conversion price of P100. It is currently
selling for P560 even though the bond’s coupon rate and the market rate are equal. The common stock
obtained upon conversion is selling for P54 per share. What is the convertible bond’s conversion
premium?
a. P2
b. P20
c. P40
d. P60

Answer
P560 – P54(1000/100) = P560 – P540 = P20

8.What is the yield to maturity of a 12-year zero-coupon bond that sells for P420.00?
a. 4.64%
b. 5.26%
c. 6.51%
d. 7.50%

Answer
P1,000 = P420(1 + i)12
P1,000 = (1 + i)12
P420
1+i = 12√2.3810
i = 1.07497 - 1
= 0.07497 or 7.50

9.POS, Inc. issued P100 million of perpetual bonds. The bonds were issued in P200 denominations with an
annual coupon interest rate of 10%. Determine the current yield on these bonds if they are purchased at
the current price of P80.
a. 1.25%
b. 5.0%
c. 8.0%
d. 12.5%
 Answer
Current yield = P10/P80 = 0.125 or 12.5%

10. A P1,000,000 Philippine Treasury bond with 3 years to maturity with semi-annual payments is quoted
at 6.62 bid, 6.60 asked, and an asked yield of 6.84. How much would you pay for this security?
a. P965,800
b. P966,900
c. P967,000
d. P1,000,000

Answer
= P1,000,000 - P1,000,000(0.066/2) = P967,000
 Exercise 7 – Straight Problems

Name: ___________________________________________ Score: ________

Section: ________________________________

Instruction: Show your solutions in the space provided after each problem.
1. MJM Company has bonds outstanding with a P1,000 face value and 12 years left to maturity. They
have a 9% annual coupon payment and their current price is P1,195. The bonds may be called in 7
years at 108% of face value.

Required:
a. What is the call price?
b. What is the approximate yield to maturity?
c. What is the approximate yield to call?
d. What is the current yield?
e. Are the bonds likely to be called?

Answer
a. Call price = P1,000 x 108% = P1,080

b.
AYTM = CP + (FV – IP)
n
FV + IP
2

= 90 + (P1,000 – P1,195)
12
P1,000 + P1,195
2
= 6.72%

c.
AYTC = CP + (FV – IP)
n
FV + IP
2

= 90 + (P1,080 – P1,195)
7
P1,080 + P1,195
2
 = 6.47%

d. Current yield = Coupon payment = P90

Current price P1,195

e. Yes, the AYTC is 6.47% as compared to 6.72%.

2. Kookie Corporation issued 10-year, noncallable, 8.0% annual coupon bonds at their par value of
P1,000 five years ago. Today, the market interest rate on these bonds is 7.5%.

Required:
a. What is the current price of the bonds?
b. What is the current yield of the bonds?

Answer
a.
VB = FV(1 + i)-n + CP 1 – (1 + i)-n
i
= P1,000(1.075)-5 + P80 1 – (1.075)-5
0.075
= P1,020.23

b. Current yield = Coupon payment = P80/P1,020.23 = 7.84%

Current price

3. A 5-year, P1,000 par value bond has a 9.0% annual payment coupon. The bond currently sells for
P900.

Required:
a. What is the yield to maturity?
b. If the yield to maturity remains at its current rate, what will be the price be 3 years from now?

Answer
a.
AYTM = CP + (FV – IP)
n
FV + IP
2

= P90 + (P1,000 – P900)

5
P1,000 + P900
2
= 11.58%
b.
VB = FV(1 + i)-n + CP 1 – (1 + i)-n
i
= P1,000(1.1158)-2 + P90 1 – (1.1158)-2
0.1158
= P956.15
4. Deeds Corporation’s outstanding bonds have a P1,000 par value, a 9% coupon, 5 years to maturity,
and a 6.0% YTM. The coupons are paid semi-annually.

Required:
a. What is the price of the bonds?
b. What is the capital gains or (loss) yield in year 3?

Answer
a.
VB = FV(1 + i)-n + CP 1 – (1 + i)-n
i
= P1,000(1.03)-10 + P45 1 – (1.03)-10
0.03
= P1,127.95

b.
VB = FV(1 + i)-n + CP 1 – (1 + i)-n
i
= P1,000(1.03)-6 + P45 1 – (1.03)-6
0.03
= P1,081.26

Coupon yield = P90/P1,081.26

= 0.0832

YTM = Capital gains (CG) + coupon yield (CY)

0.06 = CG + 0.0832
CG = 0.06 - 0.0832
= -0.0232 or -2.32%

5. Two years ago, Toothpaste Company issued a 12-year, 8% semiannual coupon bond at its par value
of P1,000. Currently, the bond can be called in 5 years at a price of P1,050 and it sells for P880. (Use
only the approximate yields)

Required:
a. What is the yield to maturity? 9.91%
b. What is the yield to call? 12.03%
c. What is the bond price 1 year from now? 887.24
d. Refer to letter c, what is the expected capital gain or (loss) yield?

Answer
a.
AYTM = CP + (FV – IP)
n x2
FV + IP
2
= P40 + P1,000 – P880
20 x2
P1,000 + P880
 2
= 0.09787or 9.79%

b.
AYTC = CP + (FV – IP)
n x 2
FV + IP
2

= P40 + P1,050 – P880

10 x2
P1,050 + P880
2
= 11.81%

c.
VB = FV(1 + i)-n + CP 1 – (1 + i)-n
i
= P1,000(1.0979)-18 + P40 1 – (1.0979)-18
0.0979
= P518.67

d. Coupon yield = Coupon payment = P80/P518.67 = 15.42%

Current price

YTM = CGY + CY
0.09 = CGY + 0.1542
CGY = 0.09 – 0.1542
= - 0.0642 or -6.42%

6. In 2020, Murphy Company issued 15-year bonds with a 15% annual coupon rate at their P1,000 par
value and was issued at P950. The bonds had a 10% call premium, with 5 years of call protection. In
2025, Donkey called the bonds. (Use the approximate yield formula)

Required:
a. What is the yield to maturity?
b. What is the yield to call?
c. Was the decision to call the bonds correct?

Answer
a.
AYTM = CP + (FV – IP)
n
FV + IP
2
= P150 + P1,000 – P950
15
 P1,000 + P950
2
= 15.73%

b.
AYTC = CP + (FV – IP)
n
FV + IP
2
= P150 + P1,100 – P950
5
P1,100 + P950
2
= 17.56%

c. No, because the AYTM is lower than the AYTC.

7. Ms. Meta Bah has bonds issued with a par value of P1,000 and 20 years left until it matures. The
coupon payment is P120 every year. The bonds may be called in 10 years at P1,300. Currently, the
bond sells at P1,400. The interest rate after 1 year will be 11%. What is the bond rate of return
(expected rate of return) for the one year (for the first year)?

Answer
The value of the bond after a year is

VB FV(1 + i)-n + CP 1 – (1 + i)-n

= i
= P1,000(1.11)-19 + P120 1 – (1.11)-19
0.11
= P1,078.39

Rate of return = P1,078.39 – P1,400 + 120 = -14.40%

P1,400

8. Kristine Company issued bonds that pay coupons of P40 quarterly. The Par value of the bonds is
P1,000. Currently, the bonds sell at par. The original maturity of the bond is 15 years. Though it can
be called in 5 years for P1,070. What is the effective annual return required by the holders of these
bonds?

AYTM = CP + (FV – IP)

n x 4
FV + IP
2
= P40 + P1,000 – P1,000
60 x4
P1,000 + P1,000
 2
= 0.04 x 4
= 0.16 or 16%

Effective annual return = (1.04)-4 – 1

= 0.16985 or 16.99%

9. FLT, a fund manager, find the following quote for a corporate bond (P1,000 par, paying interest
semiannually):

Issuer Yield
Symbol Coupon Maturity Moody's/S&P/Fitch High Low Last Change
Name %
ALLDY HD.GF 4.630% Aug 2025 Baal/BBB+/BBB+ 98.286 97.367 97.731 0.295 5.49%

a. What was the range of the price for the given day?
b. How many dollars would you receive from each coupon payment?
c. Approximately what risk level is implied by the bond rating?
d. What would have been the Last Price on the day before?

Answer:
a. The high price was 98.286% × 1,000 = P982.86; the low price for the day was 97.367% × 1,000 =
P973.67 for a range of P9.19.
b. P Coupon = (0.04630/2) × 1,000 = P23.15 received every six months
c. The bond rating implies this is a medium-grade bond that lacks outstanding protection
characteristics; in other words, the bond issuer may have difficulty making the promised
payments in full and on time, particularly if the economy does not perform well.
d. The Last Price in the quote is 97.731 and the change was +0.295, so the prior Last quote was
97.731 − 0.295 = 97.436 or 97.436% × 1,000 = P974.36.

10. On September 5, 2021, Johnny Cash purchased a P10,000 T-bonds that matures on July 15, 2033
(settlement occurs one day after purchase, so you receive actual ownership of the bond on September
6, 2021). The coupon rate on the T-bond is 4.375 percent and the current price quoted on the bond is
105.250 percent. The last coupon payment occurred on April 15, 2021 (144 days before settlement)
and the next coupon payment will be paid on October 15, 2021 (40 days from settlement).

Required:
a. Calculate the accrued interest due to the seller from the buyer at settlement.
b. Calculate the dirty price of this transaction.

Answer:
a. Accrued interest over the 145 days is calculated as:

P10,000 x (0.04375/2) x 145/184 = P172.38

b. Dirty Price = Clean price + Accrued interest
= P10,000(1.0525) + P172.38
= P10,525 + P172.38
= P10,697.38
11. A P1,000 face value corporate bond with a 7.0 percent coupon (paid semiannually) has 15
years left to maturity. It has had a credit rating of BBB and a yield to maturity of 7.5 percent.
The firm has recently gotten into some trouble and the rating agency is downgrading the
bonds to BB. The new appropriate discount rate will be 8.5 percent. What will be the change
in the bond’s price in pesos and percentage terms?

Answer:
Before the rating change:

VB FV(1 + i)-n + CP 1 – (1 + i)-n

= i
= P1,000(1.0375) + P35 1 – (1.0375)-30
-30

0.0375
= P955.43

After the rating change:

VB FV(1 + i)-n + CP 1 – (1 + i)-n
= i
= P1,000(1.0425)-30 + P35 1 – (1.0425)-30
0.0425
= P874.16

Change in peso = P874.16 – P955.43

=P81.27

Change in percent = P874.16 – P955.43

P955.43
= -0.0851 or -8.51%

12. Pryce, Inc. has a convertible bond issue outstanding. Each bond, with a face value of P1,000,
can be converted into common shares at a rate of 50.25 shares of stock per P1,000 face value
bond (the conversion rate), or P19.90 per share. Pryce’s common stock is trading at P15.90
per share and the bonds are trading at P975.

Required:
a. Calculate the conversion value of each bond.
b. Determine if it is currently profitable for bondholders to convert their bonds into
shares of Pryce Hotel, Inc. common stock.

Answer:
a. If a bondholder were to convert Pryce Inc. bonds into stock, each bond (worth
P975.00) could be exchanged for 50.25 shares of stock worth P19.40. The conversion
value of the bonds is: P19.40 x 50.25 = P974.85
b. The bonds are currently worth P975.00 per bond, while their conversion value is
P974.85. Thus, there is virtually no difference in the peso value of the investment to
the investor if he or she holds Pryce’s debt or its common stock equivalent.