Welcome to the world of bonds! In this lesson, we'll delve into the realm of fixed-income securities and explore how bonds work as investment vehicles.
Get ready to:
Illustrate the concept of bonds, understanding their characteristics as debt securities.
Define key terms related to bonds, such as "coupon," "coupon rate," "maturity date," "yield to maturity," and "par value," building a strong financial vocabulary.
Solve real-life examples related to bonds, applying your knowledge to practical scenarios and making informed investment decisions.
By the end of this lesson, you'll have a solid understanding of bonds, empowering you to navigate the world of fixed-income investments with confidence. Let's embark on this journey!
Scenario: Imagine you have ₱5,000 to lend. You have two friends who want to borrow it:
Friend A: Offers to pay you back ₱5,500 in one year.
Friend B: Offers to pay you back ₱5,250 in six months.
Which friend's offer seems more appealing? What factors are you considering when making your decision? How does this relate to the concept of bonds?
How does lending money to a friend compare to investing in a bond? What are the similarities and differences?
Why might an investor choose to buy a bond instead of a stock? What are the potential advantages and disadvantages of each?
If interest rates in the economy rise, what might happen to the price of existing bonds? Why?
Research a bond issued by a company or government. What is its coupon rate, maturity date, and current price?
This lesson delves into the world of bonds, a different but equally important investment vehicle compared to stocks. Let's explore the key concepts and terminology surrounding bonds.
Imagine lending money to a company or government and receiving regular interest payments in return – that's essentially what a bond is. It's a debt security that represents a loan made by an investor to a borrower.
Bond: A bond is a legally binding agreement where the issuer (borrower) promises to pay the bondholder (lender) a fixed amount of money (the principal) at a specified date (maturity date), along with periodic interest payments (coupons).
Coupon: This is the periodic interest payment that the bondholder receives, typically semi-annually. Think of it as the "rent" you receive for lending out your money.
Coupon Rate: This is the annual interest rate that determines the amount of each coupon payment. It's important to note that the coupon rate is fixed at the time the bond is issued and doesn't change with market interest rates.
Price of a Bond: This is the price at which the bond is currently trading in the market. It can be equal to, less than, or greater than the bond's face value, depending on factors like prevailing interest rates and the bond's creditworthiness.
Par Value: This is the principal amount that the bondholder will receive at maturity. It's also the amount used to calculate the coupon payments.
Term of a Bond: This is the time remaining until the bond matures, at which point the bondholder receives the par value back.
Fair Price of a Bond: This represents the present value of all future cash flows from the bond, including coupon payments and the principal repayment at maturity. It's determined by discounting these future cash flows using the market interest rate.
Purchased at Par: When the bond's price equals its face value, it's said to be trading at par. This typically happens when the bond's coupon rate aligns with prevailing market interest rates.
Purchased at a Discount: If the bond's price is lower than its face value, it's trading at a discount. This occurs when the bond's coupon rate is lower than current market interest rates.
Purchased at a Premium: Conversely, if the bond's price is higher than its face value, it's trading at a premium. This happens when the bond's coupon rate is higher than current market interest rates.
Problem: A bond has a face value of P300,000 and a 10% coupon rate payable semi-annually. What is the semi-annual coupon payment?
Solution:
Face Value (F) = P300,000
Coupon Rate (r) = 10% = 0.10
Annual Coupon Amount = F * r = P300,000 * 0.10 = P30,000
Semi-annual Coupon Amount = Annual Coupon Amount / 2 = P30,000 / 2 = P15,000
Therefore, the semi-annual coupon payment is P15,000.
Explore the world of fixed-income investments! Here's a video lesson to understand more about bonds, coupons, and par value!
Time to explore the world of bonds! This assessment focuses on your understanding of bond terminology, such as coupons, coupon rates, and bond prices. You'll also tackle real-life examples and solve problems related to bond investments.
Instruction: Use online resources, critical thinking, and the provided information to answer the following questions. Justify your answers with explanations and calculations. Upload your documents on this google drive link: Module 3 Lesson 2 Activity Outputs
(Note: Make sure your file name will be your Section-Year-Surname-Given_Name-Module#-Lesson#-Output#, for example: [GAS11-DelaCruz-Juan-Module1-Lesson1-Output1]. Wrong file name will subject to score deduction.)
Instructions: This quiz tests your understanding of bonds and related concepts. Use online resources, critical thinking, and the provided examples to answer the following questions. Justify your answers with explanations and calculations.
Scenario: You are considering investing in a bond issued by a Philippine company. The bond has a face value of ₱50,000, a coupon rate of 6% payable semi-annually, and a maturity date of 5 years from now. The prevailing annual market rate for similar bonds is 5%.
Question: Calculate the fair price of this bond. Is the bond selling at par, at a discount, or at a premium? Explain your answer.
Real-World Application: Research a recent bond issuance by a company listed on the Philippine Dealing & Exchange Corp.
Question: What is the coupon rate, maturity date, and current trading price of the bond? Based on the current market rate, is the bond trading at par, at a discount, or at a premium? What factors might be influencing the bond's price?
Concept Application: Explain the difference between the coupon rate and the market rate (yield to maturity) of a bond.
Question: How do these rates affect the price of a bond? Provide a hypothetical example to illustrate your explanation.
Critical Thinking: Interest rates in the Philippines have been rising recently.
Question: How would this affect the price of existing bonds? Would you be more or less likely to invest in bonds in a rising interest rate environment? Explain your reasoning.
Comparison: Compare and contrast investing in bonds versus investing in stocks.
Question: What are the advantages and disadvantages of each investment type? Which would be more suitable for a risk-averse investor? Which would be more suitable for a long-term investor with a higher risk tolerance? Justify your answers.
Bonds making sense? Time to see how the markets track these investments in Lesson 3!