Time Value of Money

1. A bond issue of 10%, five-year bonds with a face value of P100,000 with interest payable semiannually on January 1
and July 1. If the discount rate (required rate of return) is the same as the contractual rate, how much will the bonds
sell at face value?
10% Contractual Rate—10% Discount Rate
Present value of principal to be received at maturity
P100,000 X PV of 1 due in 10 periods at 5%
P100,000 X .61391 (Table 3) P61,391
Present value of interest to be received periodically
over the term of the bonds
P5,000 X PV of 1 due periodically for 10 periods at 5%
P5,000 X 7.72173 (Table 4) 38,609
Present value of bonds P100,000

2. Taking into consideration the preceding number but assume that the investor’s required rate of return is 12%, not
10%. What is the present value of the bonds?
10% Contractual Rate—12% Discount Rate
Present value of principal to be received at maturity
P100,000 X .55839 (Table 3) P55,839
Present value of interest to be received periodically
over the term of the bonds
P5,000 X 7.36009 (Table 4) 36,800
Present value of bonds P92,639

3. Taking into account the same information in No. 1 but, conversely, if the discount rate is 8% and the contractual rate
is 10%. What is the present value of the bonds?
10% Contractual Rate—8% Discount Rate
Present value of principal to be received at maturity
P100,000 X .67556 (Table 3) P67,556
Present value of interest to be received periodically
over the term of the bonds
P5,000 X 8.11090 (Table 4) 40,555
Present value of bonds P108,111

4. Today your bond is worth P5,000,000. You invested P500,000 in the bond 18 years ago. What average annual rate of
return did you earn on your investment? Answer: 13.646%.

5. You invest P1,000,000. During the first year the investment earned 20% for the year. During the second year, you
earned only 4% for that year. How much is your original deposit worth at the end of the two years?
FV = PV x (1+i1) x (1+i2)
= P1,000,000 x (1.20`) x (1.04) = P1,248,000

6. Suppose you make an investment of P1,000,000. This first year the investment returns 12%, the second year it returns
6%, and the third year in returns 8%. How much would this investment be worth, assuming no withdrawals are made?
FV=1,000,000 x (1.12) x (1.06) x (1.08)
= P1,282,176

7. How much would you need to deposit every month in an account paying 6% a year to accumulate by P1,000,000 by
age 65 beginning at age 20?
FV = P1,000,000 PMT = ?
i = 6%÷12 = 0.5% per month
n = (65-20) x 12 = 45 x 12 = 540 months.
PMT = P362.85

8. What is the yield to maturity on a 10-year, 9% and P1,000 bond that sell for P887.00? 10.74%
𝑖 + (𝐹𝑉 − 𝑃)/𝑛
𝑌𝑇𝑀 =
(𝐹𝑉 + 𝑃)/2

90 + (1,000 − 887)/10
𝑌𝑇𝑀 =
(1,000 + 887)/2

101.30
𝑌𝑇𝑀 =
943.50
 Time Value of Money

YTM = 10.74%

9. What is the yield to maturity on a 10-year, 9% and P1,000 bond that sell for P1,134.20? 7.18%
𝑖 + (𝐹𝑉 − 𝑃)/𝑛
𝑌𝑇𝑀 =
(𝐹𝑉 + 𝑃)/2

90 + (1,000 − 1,134.20)/10
𝑌𝑇𝑀 =
(1,000 + 1,134.20)/2

76.58
𝑌𝑇𝑀 =
1,067.10
YTM = 7.18%
10. Suppose a 10-year, 10%, semi-annual coupon bond with a par value of P1,000 is currently selling for P1,135.90,
producing a yield to maturity of 8%. However, the bond can be called after 4 years for a price of P1,050. What is the
bond’s yield to call? 7.18%
𝑖 + (𝐶𝑃 − 𝑃)/𝑛
𝑌𝑇𝐶 =
(𝐶𝑃 + 𝑃)/2

100 + (1,050 − 1,135.90)/4

𝑌𝑇𝐶 =
(1,050 + 1,135.90)/2

78.53
𝑌𝑇𝐶 =
1,092.95

YTC = 7.18%