Name Grade Level & Section: Quarter2-Week5-Day2. Illustrate stocks and bonds. Distinguishes between stocks and bonds. Describes the different markets for stocks and bonds. analyzes the different market indices for stocks and bonds. I. II. III. Specific Objectives for the day 1. Illustrate and distinguish stocks and bonds 2. Describes the markets for bonds. References General Mathematics Module 8 Development of the Lesson Hi! It is me again, Mark I hope you have considered stocks as a good investment during our last meeting. but I must remind you that investing in stocks is risky since the market always fluctuates and may crash especially in times like the pandemic. I have a new offer for you that you may consider. It is called BONDS. If you want assurance of a return in your investment, bonds can do it. Suppose you are to buy bonds with a face value of ₱50,000.00, if the company pays 10 %, payable semi-annually for its coupons for 5 years, it means you’ll receive a fixed payment semi-annually, how much will you be receiving in total after 5 years? STOCKS A form of equity financing or raising money by allowing investors to be part owner s of the company Stock prices vary every day. These prices are reported in various media (newspaper, TV, internet, etc.) Investing in stocks involves some uncertainty. Investors can earn if the stock prices increase,, but they can lose money if the stock prices decrease or worse, if the company goes bankrupt. BONDS A form of debt financing or raising money by borrowing from investors. Investors are guaranteed interest payments and a return of their money at the maturity date Uncertainty comes from the ability of the bond issuer to pay the bondholders. Bonds issued by the government pose less risk than those by companies because the government has guaranteed funding (taxes) from which it can pay its loans. Higher risk but with possibility of Lower risk but lower yield. higher returns. Can be appropriate if the Can be appropriate for retirees investment is for the long term(10 (because of the guaranteed fixed years or more). This can allow income) or for those who need the investors to wait for stock prices to money soon(because they cannot increase if ever they go low. afford to take a chance at the stock market) Investors purchased bonds issued by companies to fund their expenses in expansion, projects, etc.. Investors who purchased bonds are essentially ‘lenders’ to the issuer. However, the investors should be compensated for the lending their money. Aside from being paid the loan at the end of a fixed amount of time, the investor also receives payments, usually every six months. Bond – interest bearing security which promises to pay a stated amount of money on the maturity date, and regular interest payments. Coupon – periodic interest payment that the bondholder receives during the time between purchase date and maturity date: usually semiannually. Coupon Rate – the rate per coupon payment period; denoted by r. Price of a Bond – the price of the bond at purchase time, denoted by P. Par Value or Face Value – the amount payable on the maturity date; denoted by F. If P = F, the bond is purchased at par If P < F, the bond is purchased at a discount If P > F, the bond is purchased at premium. Term (Tenor) of a Bond – fixed period of time (in years) at which the bond is redeemable as stated in the bond certificate, number of years from time of purchase to maturity date. Fair Price of a Bond – present value of all cash inflows to the bondholder. The main platform for bonds or fixed income securities in the Philippines is the Philippine Dealing and Exchange Corporation (or PDEx). Unlike stock indices which are associated with virtually every stock market in the world, bond market indices are far less common. In fact, other than certain regional bond indices which have sub-indices covering the Philippines, our bond market does not typically compute a bond market index. Instead, the market rates produced from the bond market are interest rates which may be used as benchmarks for other financial instruments. Score: _______ So now, calculating for the coupons that you may receive semi-annually, Given: Face Value = ₱50,000.00 Coupon Rate = 10% Find: Amount of the Semi-annual Coupon Annual Coupon amount: 50,000(0.10) = 5,000 Semi-annual Coupon Amount = 5,000(1/2) = 2,500 Thus, the amount of the semi- annual coupon is 2,500. You’ll be receiving 2,500 semi-annually for five years plus the Face value of the bond which is ₱50,000.00 Examples. 1. Determine the amount of semi-annual coupon paid for a 4% bond with a face value of ₱ 200,000 which matures after 10 years. How much and how many coupons are paid? Given: Face Value, F = ₱ 200,000 Coupon Rate, r = 4% Find: Number and Amount of each Coupon 𝑟 0.04 Semi-annual Coupon Amount = (F)( ) = 200,000 ( ) = 4, 000 2 2 In 10 years, there are 10 x 2= 20 payments Thus, each semi-annual coupon is ₱4,000, paid 20 times every 6 months. 2. A certain bond pays coupons of ₱ 6,000 every six months for 6 years, Given: Semi-annual coupons = 6,000 Face Value = 150,000 Time to maturity = 6 years Number of periods = 2(6) = 12 Market rate = 4% Find: Fair Price of the bond Present Value of the ₱ 150,000: 𝑭 𝟏𝟓𝟎,𝟎𝟎𝟎 P= 𝒏 = 𝟔 = 118, 547.18 (𝟏+𝒋) (𝟏+𝟎.𝟎𝟒) Present Value of 12 semi-annual payments of ₱6,000 each with 4% interest per period: Convert 4% to equivalent semi-annual rate: (1+0.04)1 = (𝟏 + 𝒊(𝟐) 𝟐 Thus, P= R = = 0.019804 𝟏− (𝟏+𝒋)−𝒏 𝒋 𝒊(𝟐) 𝟐 ) 𝟐 = 6,000 𝟏− (𝟏+𝟎.𝟎𝟏𝟗𝟖𝟎𝟒)−𝟏𝟐 𝟎.𝟎𝟏𝟗𝟖𝟎𝟒 = 63,528.49 Fair Price = 118, 547.18+ 63,528.49 = ₱182,075.67 Thus, a price of ₱182,075.67 is equivalent to all future payments, assuming an annual market rate of 4%. IV. Exercises 1. Determine the amount of semi-annual coupon paid for a 2.75% bond with a face value of ₱75,000.00 which matures after 10 years. 2. Suppose that a bond has a face value of ₱100,000.00 and its maturity date is 10 years from now. The coupon rate is 5% payable semi-annually. Find the amount of the semi-annual coupon. 3. Find the amount of the semi-annual coupon for a ₱ 500,000 bond which pays 3.5% convertible semi-annually for its coupons. 4. A ₱300,000.00 bond is redeemable at ₱425,000.00 after 6 years. Coupons are given at 4% convertible semi-annually. Find the amount of the semi-annual coupon. 5. A bond promises to pay the bondholder equal payments of ₱ 4,000 in six-month intervals for 15 years. If the face amount is ₱225,000, what is the fair price of the bond? Assume that the market rate is 2.5% compounded semi-annually. Answer Key 1. ₱ 1,031.25 2. ₱ 2,500.00 3. ₱ 8,750.00 4. ₱ 6,000.00 5. ₱ 238,721.12 V. Evaluation General Instructions: Solved for what is asked in each item: Show your solutions neatly on the space provided. (3 points each) 3 points Complete solutions Correct final answer Rubrics for Scoring 2 points 1 point Incomplete No solutions solutions Correct final Correct final answer answer 1. Determine the amount of the semi-annual coupon for a bond with a face value of ₱ 200,000.00 that pays 8%, payable semi-annually for its coupons. 2. Suppose that a bond has a face value of ₱ 250,000 and its maturity date is 15 years from now. The coupon rate is 6% payable semiannually. Find the fair price of this bond, assuming that the annual market rate is 6%. 3. Determine the amount of the semi-annual coupon for a bond with a face value of ₱ 650,000 that pays 8.5%, payable semi-annually for its coupons. 4. Suppose that a bond has a face value of ₱ 50,000 and its maturity date is 7 years from now. The coupon rate is 10% payable semiannually. Find the fair price of this bond, assuming that the annual market rate is 8%. For items 5-10: Tell whether the following is a characteristic of a stocks or bonds. 5. It can be appropriate for retirees because of guaranteed fixed income Answer: 6. Investors are guaranteed interest payments and a return of their money at the maturity date. Answer: 7. Investors can earn if the security prices increase, but they can lose money if the security prices decrease or worse, if the company goes bankrupt. Answer: 8. A form of debt financing, or raising money by borrowing from investors. Answer: 9. A form of equity financing or raising money by allowing investors to be part owners of the company. Answer: 10. Higher risk but with possibility of higher returns. Answer: