VALUATION OF BONDS

CONTENT
1. Characteristics of Bonds (Definition and Parties)
2. Valuation of Bonds – issued at par, at a premium or at a
discount
3. YTM vs YTC
4. Computation of RRR
5. Computation of ETR
DEFINITION
➢A bond is a long-term debt instrument issued by the
government agencies or corporations to the public in order to
raise needed funds.
➢Moreover, it is a long-term contract indicating that the holder of
these instruments will receive a fixed interest payment known
as coupon payment each year until its maturity date and also
receive a principal payment, known as face value, on the said
maturity date.
PARTIES
1. Bondholder
✓is the investor who extends loans to the company certain
amount of money equivalent to the value of the bond issued.
✓these bondholders are also known as lenders or creditors of the
company.

2. Issuer
✓may either be corporation or government
CHARACTERISTICS
Common Characteristics
1. Maturity Date
2. Face Value
3. Coupon Payment
4. Coupon Interest Rate
CHARACTERISTICS

AP Corporation issued a 20 year, P1,000 bond with stated

rate of 6% on January 31, 2023.
CHARACTERISTICS
Other Characteristics

1. Issued with Call Provision (Callable Bond)

✓A provision that gives rights or privilege to the issuer to redeem
the bond at a certain “call price” prior to its maturity.

2. Issued with Put Provision (Putable Bond)

✓It is a provision that gives right or privilege to the bondholder
to “put back” or require the issuer to repurchase the said bond
at a certain “put price” prior to maturity.
CHARACTERISTICS
Other Characteristics

3. Issued with Convertible Features (Convertible Bonds)

✓This gives the bondholders the right or option to convert the bond
into the number of shares of common stocks at a predetermined
price.

4. Issued with Warrants

✓This gives the bondholder the right or option not to convert the
bond but an option to buy shares of common stock from a company
at a predetermined price.
CLASSIFICATION
1. Non-zero Coupon Bond
✓offers a stream of coupon interest payments during the life of
the bond

2. Zero Coupon Bond

✓does not pay interest at all
NON-ZERO COUPON BOND

➢The value of this bond is equal to the present values of cash

flows from interest or coupon payments and cash flow from the
terminal or face value which is the maturity value of the bond.
NON-ZERO COUPON BOND

VALUE OF BONDS
NON-ZERO COUPON BOND
Illustration:

What is the value of a fifteen (15), P1,000 corporate bond with

stated rate of 10% per annum?

Assume that the bond of similar quality yields 10% rate.

NON-ZERO COUPON BOND
Analyses:
If the discount rate is equal to the stated rate;
1. The market value of the bond amounts to P1,000 which is
equal to the face value or Par Value.
2. The amount to be paid by the investor is equal to the face or
Par Value.
3. The bond is issued at par or face value.
NON-ZERO COUPON BOND
Illustration:

What is the value of a fifteen (15), P1,000 corporate bond with

stated rate of 10% per annum?

Assume that the bond of similar quality yields 8% rate.

NON-ZERO COUPON BOND
Analyses:
If the discount rate is lower than the stated rate;
1. The market value of the bond amounts to P1,171.19 which is
above the Face Value or Par Value
2. The amount to be paid by the investor is higher than the Face
or Par Value.
3. The bond is issued at a premium.
4. The difference between the market value of the bond and the
face value is called the bond premium.
NON-ZERO COUPON BOND
Illustration:

What is the value of a fifteen (15), P1,000 corporate bond with

stated rate of 10% per annum?

Assume that the bond of similar quality yields 12% rate.

NON-ZERO COUPON BOND
Analyses:
If the discount rate is higher than the stated rate;
1. The market value of the bond amounts to P863.78 which is
below the Face Value or Par Value
2. The amount to be paid by the investor is lower than the Face
or Par Value.
3. The bond is issued at a discount.
4. The difference between the market value of the bond and the
face value is called the bond discount.
ZERO COUPON BOND
➢This bond has no coupon interest payment but are usually sold
below its FV or issued at a discount.
➢The investors of this kind of bonds receive earnings through
the appreciation or rise in the bond’s value from the discounted
selling price (price paid by the bondholder) to the face value
(price paid by the issuer) when redeemed at date of maturity.
➢Since there is are no periodic interest payments in this kind of
bonds, the only cash inflow to be expected by the bondholder is
the principal payment or FV.
ZERO COUPON BOND

VALUE OF BONDS
ZERO COUPON BOND
Illustration:

Canido Corporation issued a zero coupon bond with 15 years

until maturity and a P1,000 Face Value. Determine the value of
the bond if the discount rate (RRR) is 8%.
ZERO COUPON BOND
Illustration:

Canido Corporation issued a zero coupon bond with 15 years

until maturity and a P1,000 Face Value. Determine the value of
the bond if the discount rate (RRR) is 9%.
REQUIRED RATE OF RETURN
➢A bond’s yield is the required rate of return or discount rate
that will make the discounted value of the expected future cash
inflows equal to the current market value of the bond.
➢When the intrinsic value of the bond to the investor equates to
the market value, there is equilibrium between the required rate
of return of a bond and the bond’s yield.
REQUIRED RATE OF RETURN
Can be solved using:

1. Interpolation Process
2. YTM/YTC formula (Simple Average)
3. YTM/YTC formula (Weighted Average)
REQUIRED RATE OF RETURN
REQUIRED RATE OF RETURN
REQUIRED RATE OF RETURN
Illustration:

A P1,000 ABCD Corporate bond was issued on January 1, 2023

with annual coupon interest rate of 8%. The current market
value of the bond is P935.82 and it matures in 10 years.

Determine the discount rate or the yield to maturity.

REQUIRED RATE OF RETURN
Illustration:

CBA Corporation has bonds outstanding with P1,000 face value and 10
years left until maturity. They have 12% annual coupon payments,
and the current market value is P1,120. Those bonds can be called
starting 5 years at 105% of the face value.

i. Determine the YTM assuming the corporation did not exercise its
rights to call.
ii. Determine the YTC if assuming the corporation called in 5 years.
EXPECTED TOTAL RETURNS

➢Are the amount of cash inflows from interest payments,

maturity value (face value) and call price.
➢The total return attributable to the bondholder can either be
the yield to call or yield to maturity.
EXPECTED TOTAL RETURNS
EXPECTED TOTAL RETURNS

Illustration:

AMV purchased on January 1, 2022 a P1,000 face value bond

issued by CBM Corporation with 9% annual coupon interest and
10 years to maturity for P950. If AMV sold the bond on January
1, 2023 for P970 to Wash Sy Gorres, what is the total rate of
return earned by AMV on the investment?
VALUATION OF STOCKS
CONTENT
1. Different kinds of stocks
2. Different kinds of preference shares
3. Non-discounted method in valuing stocks
4. Discounted Method in valuing stocks
✓Discounted Dividend Model
✓Corporate Valuation Model
DEFINITION

➢Stocks are securities that represent ownership of a company

and entitlement of such company’s net assets and profits.
➢Usually, stocks are classified into common or ordinary and
preferred shares.
DIFFERENCE
ORDINARY SHARES PREFERED SHARES
Claim over Assets YES YES , BUT WITH PRIORITY IN
DISTRIBUTIONS DURING
LIQUIDATION
Claim over Earnings YES, BUT DEPENDS ON PLAN YES, BUT WITH PRIORITY IN
Distribution (Dividends) DISTRIBUTION OF DIVIDEND DISTRIBUTION
PREFERENCE SHARES

MAY NOT RECEIVE DIVIDENDS

Voting Rights YES NO
(Influence/Control over
corporate actions)
KINDS
1. Cumulative – those shares which entitle the holder to current dividends as
well as those dividends in arrears or those dividends which were not provided
in previous years.
2. Non-cumulative – those shares entitles the holder to only current dividends.
The company is no longer liable for dividends not declared in previous years to
holders of these shares.
3. Participating – those shares that entitles the holder to surplus profits after
the provision of the basic dividend to all classes of shares.
4. Non-participating – only the basic dividend shall be provided to holders of
this kind of preference shares. Surplus profits after the provision of the basic
dividend shall be given to other classes of shares.
5. Redeemable – these are preference shares that grant the issuing company
the right or power to redeem, purchase or “buy back” the shares after a
certain period.
6. Convertible - these are shares that can be converted into another class of
shares (usually convertible to ordinary shares)
STOCKS VALUATION
➢In the Philippines, non-listed and traded entities wishing to
trade in the local stock exchange are mandated to acquire
fairness opinion or a valuation report from accredited firms.
➢The opinion or report contains a computation of the value of
the company’s stock.
➢Investors make decisions by simply determining the potential
for profit or loss.
➢Each security an investor hold may either give such investor
gains or losses in a particular period of time.
STOCKS VALUATION
➢Fundamentally speaking, investors are at advantage if it would be
able to estimate properly a stock’s intrinsic (“true”) value.

INTRINSIC VALUE > STOCK PRICE (Traded Price) = UNDERVALUED = BUY OR ACQUIRE

INTRINSIC VALUE < STOCK PRICE (Traded Price) = OVERVALUED = SELL OR DON’T ACQUIRE
METHODS
1. Non- Discounted Techniques – this method of stock valuation
takes into consideration the financial performance of the
company or the current book value of its shareholders’ equity.
Furthermore, these techniques utilize market information and
employ the market information to the net income of the
company being valued.
2. Discounted Techniques – the most common valuation
techniques involve the consideration of future cash flows that
may be generated from such stock. Considering that the
computations may involve future cash flows, appropriate
discounting should be made to place these future cash flows to
its present value.
NON-DISCOUNTED TECHNIQUES
1. Book Value or Net Asset Value Approach
✓the net asset value or book value approach utilizes the total
shareholders’ equity portion of the financial statements.
✓the objective of this approach is to determine the net asset value per
share which ultimately represents the equity or the value of each
ordinary share.
✓It is also the amount that would be paid on each share assuming that
the company is liquidated.

BV or NAV per share = TOTAL SHE / NO. OF OUSTANDING SHARES

BV or NAV per share = TOTAL SHE – SHE ATTRIBUTABLE TO PS / NO. OF COMMON SHARES OUSTANDING
NON-DISCOUNTED TECHNIQUES
ILLUSTRATION:

A21 company has the following information derived from its most
recent audited financial statements:
• Total Assets = P20,000,000,000
• Total Liabilities = P10,000,000,000
• No. of ordinary shares issued and outstanding = 1,000,000,000

Determine the BVPS or NAVPS.

NON-DISCOUNTED TECHNIQUES
ILLUSTRATION:

A21 company has the following information derived from its most
recent audited financial statements:
• Total Assets = P20,000,000,000
• Total Liabilities = P10,000,000,000
• No. of ordinary shares issued and outstanding = 1,000,000,000

If the company had another class of stock such as preferred shares

amounting to 600,000,000 shares with a total equity of 2,500,000,000
Determine the BVPS or NAVPS.
NON-DISCOUNTED TECHNIQUES
2. Price-Earnings Relative Valuation Approach
✓Several investors believe that the value (price) of a stock is related to
its financial performance, particularly its net income.
✓Furthermore, these investors believe that the change in the price of a
stock is directly attributable to its earnings.

Value of Stock = Corporate Value / No. of CS issued and outstanding

Corporate Value = Net Income x Price Earnings Ratio

NON-DISCOUNTED TECHNIQUES
ILLUSTRATION:

MA 21 Technologies, Inc. has a net income of P1 billion reported

on the previous year’s audited FS. In the same period, the
company has 1 billion in shares issued and outstanding. MA 21
Technologies is currently operating in the computer and gadgets
industry. Information has been gathered that the prevailing P/E
Ratio in the computer industry is 5x.

Determine the value of the stock.

DISCOUNTED TECHNIQUES
1. Discounted Dividend Model
✓This model takes into consideration the expected cash flows of
investment in stocks which are dividends and stock price upon sale.
✓Simply put, the value of the stock depends on the present value of all
the dividends and the price of the stock once it is sold.
✓This model primarily relies on the proper estimation of a stock’s growth
rate which is one of the key features of this valuation method.
DISCOUNTED TECHNIQUES
1. Discounted Dividend Model
DISCOUNTED TECHNIQUES

1. Discounted Dividend Model

this model assumes that dividends grow in three possible ways

i. Zero or No Growth Stocks
ii. Constant Growth Stocks
iii. Non-constant Growth Stocks
DISCOUNTED TECHNIQUES
A. Zero or No Growth Stocks
✓A situation where a stock and its dividends do not grow.
✓Considering that this valuation model is primarily based on dividends
and growth rate, preferred shares exhibit the same characteristics as
that of zero or no growth ordinary stocks.
✓Under this assumption, dividends today (Do) is equal to future
dividends such as D1, D2, D3 and so on.
DISCOUNTED TECHNIQUES
Illustration:

MA22 Hotels Corporation has paid P5.00 dividends last year to its
stockholders. The company expects that this dividend will not
grow in its succeeding years of operation. The shareholders
expect a 10% return on RF’s stock.
DISCOUNTED TECHNIQUES
B. Constant Growth Stocks
✓A situation where a stock and its dividends grow at a constant rate
throughout its life.
✓Constant growth stocks exhibit a kind of growth rate that does not
change during the life of a stock.
✓In fact, zero or no growth stock may be a form of constant growth
stock, only that it has zero or no growth during the life of that stock.
DISCOUNTED TECHNIQUES
Illustration:

IA 21 Corporation stock is expected to declare a P7.00 dividend at

the end of the year. Similar stocks return is 16%. IA 21’s stock is
expected to grow at a rate of 6% annually for the rest of the
stock’s life.
DISCOUNTED TECHNIQUES
C. Non-constant Growth Stocks
✓A situation where a stock and its dividends grow at a different rate at
the earlier part of its life.
✓Such growth shall terminate at a horizon or terminal date where the
stock and its dividend begin to grow at a constant rate.
✓As such, there are two phases in the life of non-constant growth stocks:
a. Non-constant growth phase
b. Constant growth phase
✓Terminal date is the period in which the dividends stop growing non-
constantly and begins growing at a constant rate forever.
✓Terminal Value is computed similarly to a constant growth stocks in
which the dividends in the constant growth phase of the stock is
collected and discounted to the terminal date.
DISCOUNTED TECHNIQUES
The formula for the valuation of non-constant growth stock is:
DISCOUNTED TECHNIQUES
Illustration:

AP Industries, Inc. expects to pay a P3.00 per share dividend to

its common stockholders at the end of the year. The dividend is
expected to grow 25% a year until the end of the third year
(t=3), after which time the dividends is expected to grow
constant rate of 5% a year. AP Industries’ stockholders require a
12% return on this stock.
CHOOSING THE BEST VALUATION METHOD
✓Valuation methods discussed present to us various kinds of
techniques and POV in computing the price of the stock.
✓As investors are wary of each kind of valuation technique,
choosing the best valuation method does not at all mean picking
the most accurate one.
✓ As it is in providing fairness opinions and valuations,
uncertainties arising from each different valuation method are
addressed by comparatively looking at the results of each
valuation method.
✓Rather than choosing one alternative, it is best to look at the
varying results as a reasonable range of the correct intrinsic or
“true” value.