Finance

Bank Account and

Credit Securities

Bank Accounts• Minimum balance required

• Interest rate or rates

• Limitations as to withdrawals

• The bank's reputation

• Insurance

Current Account

Savings Account• Saving Account

• Compounding

• Time as an Advantage

Time Deposit

Special Time Deposit

SecuritiesClassifications of Securities Markets

A. Based on maturity of securities• Money Market• Capital Market

B. Based on who is the seller• Primary Market • Secondary Market

Credit securitiesFactors to Consider in Investing in Credit Securities

• Interest rate

• Date of maturity or call

• Value of the security

• Yield on the security

• Credit rating of the issuing party

• Credit rating of the trustee (if any)

• Credit rating of the underwriter (if any)

Commercial Papers

BondsClassification of Bonds

• As to issuing party

• As to security

• As to maturity of principal

• As to transferability

As to issuing party• Government Bonds

• Commercial Bonds

As to security• Mortgage bonds

• Equipment trust bonds

• Collateral trust bonds

• Debenture bonds

As to maturity of principal

• Straight bonds

• Serial bonds

• Convertible bonds

• Callable or Redeemable bonds

• Non-callable or non-redeemable bonds

As to transferability• Bearer bonds

• Coupon bonds

• Registered bonds Registered to principal only Registered to both principal and interest

Bond Quotations; Premiums and Discounts

Effective Rate on Short-Term Bond Investment

Bonds as Long-Term Investment; Yield and Bond Value

• Yield

• Bond Value

Bond Value = Present Value of annual interest + Present Value of redemption price at maturity date

Formula:

IllustrationGHI Corp. is issuing 2,000 of 5-year, 9% Php 50,000 bonds as of January 1, 2015. How much is the bond value if the investor desires a yield of (a) 9% (b) 10% (c) 8.37%?

Future cash flows from an investment in one bond are the following:

Annual interest for 5 years (9% x Php 50,000) P 4,500

Face Value (Redemption Price at maturity date) 50,000

SCHEDULES OF EARNINGS OF BOND

a) BONDS ACQUIRED AT FACE VALUEYield of 9% on 5 years, 9% P50,000 bonds quoted at 100

b) BONDS ACQUIRED AT DISCOUNTYield of 10% on 5 years, 9% P50,000 bonds quoted at 96.21%

c) BONDS ACQUIRED AT PREMIUMYield of 8.37%on 5 years, 9% P50,000 bonds quoted at 102.492

a) BONDS ACQUIRED AT FACE VALUEYield of 9% on 5 years, 9% P50,000 bonds quoted at 100

DateA

Interested collected(P50,000 x 9%)

B9% yield

[Col. (c) X 9%]

CBond investment[Col. (c) – (a)+(b)]

P P P

1-1-2000 50,000

1-1-2001 4,500 4,500 50,000

1-1-2002 4,500 4,500 50,000

1-1-2003 4,500 4,500 50,000

1-1-2004 4,500 4,500 50,000

1-1-2005 4,500 4,500 50,000

b) BONDS ACQUIRED AT DISCOUNTYield of 10% on 5 years, 9% P50,000 bonds quoted at 96.21%

DateA


B10% yield

[Col. (c) X 10%]


P P P

1-1-2000 48,105

1-1-2001 4,500 4,811 48,416

1-1-2002 4,500 4,842 48,757

1-1-2003 4,500 4,876 49,133

1-1-2004 4,500 4,913 49,546

1-1-2005 4,500 4,954 50,000

c) BONDS ACQUIRED AT PREMIUMYield of 8.37%on 5 years, 9% P50,000 bonds quoted at 102.492

DateA


B8.37% yield

[Col. (c) X 8,37%]


P P P

1-1-2000 51,246

1-1-2001 4,500 4,290 51,036

1-1-2002 4,500 4,272 50,808

1-1-2003 4,500 4,253 50,561

1-1-2004 4,500 4,232 50,293

1-1-2005 4,500 4,207 50,000

Effects of Purchase Price on Bond Yield

• Bonds Acquired at Face Value

• Bonds Acquired at a Discount

• Bonds Acquired at a Premium

Computation for Yield on Long-Term Bond Investment

Formula:

Present value of annual interest + present value of face value = Purchase Price to Yield

Approximating Yields on Bonds

Formula:

Approximate Yield = Interest per annum + [(Principal - Value)/n]

(Principal + Value)/2

or

Approximate Yield = 1 + [(P - V)/n]

(P + V)/2

Bonds Acquired at Interest Date and Between Interest Date

Illustrative Problem:

On Jan. 1, 2002, Jose is buying 10 of MOP Corporation's P100,000, 8%, 5yr bonds at 101. These were issued by the Corp. on Jan 2, 2001. Interest payment dates are Jan 1st & July 1st. Jose acquires bonds on March 1, 2002.

Payment made (P100,000x10x1.01)P1,010,000

Less: Interest accrued (P1,000,000x8%x2/12) 13,333

Payment applied to bonds P 996,667

Gain or Loss from Bond Investment

Government securities

Treasury bills (T-bills)

Government securities

Finance

Documents

Transcript of Finance