Lesson 5: DEBT SECURITIES MARKET

The learner will be able to:

1. identify different types of bonds
2. select the bond or debt security investment that will yield higher value
3. Identify the characteristics and types of Mortgage Market
4. prepare the amortization schedule of a mortgage loan
5. Identify the different lending/ mortgage financial institutions

Debt market or Bond market- a financial market in which the participants are provided
with the issuance and trading of debt securities.

Bonds- certificate of indebtedness

1. Principal -the amount of money on which interest is paid

2. Maturity date: -the date when bond’s life ends and the borrower must make the
final interest payment and repay the principal

3. Par Value -the face value of a bond, which the borrower repays at maturity

4. Coupon/nominal -a fixed amount of interest that a bond promises to pay investors

5. Coupon rate -the rate derived by dividing the bond’s annual coupon payment by
its par value

6. Coupon/current yield -the amount obtained by dividing the bond’s coupon by its
market price (which does not equal its par value)

7. Indenture -covenants/agreement/contract

Types of Long-term Securities

Primary Market -Initial sale of bonds by issuers to large investors or syndicates

Secondary Market -the market in which investors trade with each other
 -Trades do not raise any capital for issuing firms <trading of interest and
gains or loss>

Types of Bonds: By ISSUER

1. Corporate Bonds- Usually with par value P1,000 and semi-annual coupon; bonds if
maturity > 10 years; Notes if maturity is < 10 years

2. Municipal Bonds- Issued by local or state Government; Interest are tax free

3. Treasury Bonds-
-If maturity < 1 year : Treasury Bills
-If maturity is > 1 year but < 10 years: Treasury Notes
-If maturity is > 10 years: Treasury Bonds
-Used to fund budget deficits

4. Sustainability Bonds or Green Bonds- fund environmental programs

-Purpose, evaluation and selection, proceeds and progress reporting and utilization

Types of Bonds: By FEATURES

1. Fixed vs Floating Rates
- Floating-rate bonds: coupon tied to prime rate, LIBOR, Treasury rate or other interest
rate

-Floating rate= Benchmark rate + spread

-Floating rate can also be tied to the inflation rate

2. Secured vs Unsecured Bonds

- Unsecured bonds (debentures) are backed only by general faith and credit of issuer
(trust and confidence or test of credit standing)

-Secured bonds are backed by specific assets (collateral)

-Mortgage bonds, collateral trust bonds, equipment trust certificates

3. Zero-coupon Bonds
- pay no interest
-Also known as discount bonds or pure discount bonds

-sell below par value

-Treasury Bills or Treasury STRIPS

4. Convertible and Exchangeable Bonds

-Convertible bonds, in addition to paying interest, offers the right to convert the bond into
common stock of the issuer of the bond

-Exchangeable bonds are convertible in shares of a company other than the issuer’s
shares

5. Callable Bonds and Putable Bonds

-Callable Bonds: bond issuer has the right to repurchase the bonds at a specified price
(call Price)

- Firms could retire and reissue debt if interest rates fall

-Putable bonds: The investors have the right to sell the bonds to the issuer at the put
price

6. Protection from Default Risk

- Sinking fund provisions: the issuer is required to gradually repurchase outstanding
bonds

-Protective covenants: requirements the bond issuer must meet

Strategies and Challenges in Bond Market

Economic Forces Affecting Bond Prices

 Time to maturity---Bond prices converge to par value (plus final coupon) with
passage of time
Longer the bond the higher the default risk
 Interest rates----Bond prices and interest rates move in opposite directions
  Changes in Interest rates have larger impact on long-term bonds than on short-term
bonds

Assessing Bond Value

Held to Maturity (YTM) – estimate of return investors earn if they buy the bond at Po and
hold it until maturity; The YTM on a bond selling at par will always equal the coupon rate;
YTM is the discount rate that equates the PV of Bond’s cash flows with its price

Po= Coupon Coupon ……. Coupon Principal

1 + 2 + n + n
(1+r) (1+r) (1+r) (1+r)

Example 1:
In January 1, 2012, ABC bought a 9 1/8% coupon, P1,000 par value bond, maturing at
the end of 2022, required rate of return is 8%. Determine the Present value of the bond.

Coupon 2012 1,000 x 9 1/8%= 91.25 x 0.9259= 84.49

2013 1,000 x 9 1/8%= 91.25 x 0.8573= 78.23
2014 1,000 x 9 1/8%= 91.25 x 0.7938= 72.43
2015 1,000 x 9 1/8%= 91.25 x 0.7350= 67.07
2016 1,000 x 9 1/8%= 91.25 x 0.6806= 62.10
2017 1,000 x 9 1/8%= 91.25 x 0.6302= 57.50
2018 1,000 x 9 1/8%= 91.25 x 0.5835= 53.24
2019 1,000 x 9 1/8%= 91.25 x 0.5403= 49.30
2020 1,000 x 9 1/8%= 91.25 x 0.5002= 45.63
2021 1,000 x 9 1/8%= 91.25 x 0.4632= 42.27
2022 1,000 x 9 1/8%= 91.25 x 0.4289= 39.14 651.39
Principal 2022 1,000 x 0.4289 428.89
Price or Present Value of the Bond P1,080.28
Par Value of the Bond - 1,000.00
Premium C>R P80.28
Example 2:
Value a T-Bond with par value of P1,000 and maturing in 2 years, coupon rate is 4%; r=
4.4% per year. Assuming payment is made semi-annually, calculate the price of the bond.

Coupon Year 1 1,000 x 2%= 20 x 0.9785= 19.57

Year 1 1,000 x 2%= 20 x 0.9574= 19.15
Year 2 1,000 x 2%= 20 x 0.9368= 18.74
Year 2 1,000 x 2%= 20 x 0.9166= 18.33 75.79
Principa Year 2 1,000 x 0.9166 916.60
l
Price or Present Value of the Bond P992.39
Par Value of the Bond - 1,000.00
Discount R>C P7.61
Determination of Effective Interest Rate in Bonds:

Interest= Risk Free rate* + Debt Margin**

Assumes zero
default in the
market

*Risk Free Rate= Real Risk Free rate - Inflation***

***Inflation=Consumer Price Index of Current Year/Consumer Price Index of Base
Year - 1x100
**Debt Margin=Debt Spread=Risk Premium

Example: A 10-year old Php1,000 bond with a nominal interest rate of 10% was issued
at Php1,105. The CPI for the prior year is 110.00 while in the current year it is 112.20
and forecasted to be 116.13. The margin or credit spread for this type of instrument is
4%.

Required:

(1) The bond’s effective interest rate is

I= 100 -10.5 / 1,052.50= 8.50%

10% > 8.50% = Sold at Premium

97+20/ 900=13%

(2.)The nominal risk free rate of the bond using the effective interest rate is
I= RFR + Debt Margin
8.5%= RFR + 4%
RFR= 4.5%

13= RFR+ 5
FRF=8

*nominal Risk Free Rate= Real Risk Free Rate + Inflation

(3)Assuming all things remain constant except for prices, the effective interest rate
is forecasted to be

Inflation= 2%

NRFR= REAL RFR + Inflation

4.5%=RRFR+ 2%
RRFR= 2.5%

Inflation= 3.5%
Forecasted RFR=2.5+3.5= 6%
I= 6+4
I=10%

inflation 1.5%
8=RRFR+1.5%
RRFR= 6.5%

new inflation: 1.8%

RFR= 6.5+1.8%
RFR= 8.3%
I= 8.3+5= 13.3%

(4)Assuming all things remain constant except for prices, the market value of the
bond is forecasted to be
Stated Rate vs Rate of Return
10% vs 10%

Credit Rating
AAAA
AA
A
BBB
BB
B
CCC
CC
C
D

Example: A company with BBB rating issued Php1,000 bond with 10% interest good for
20 years. The following year the company’s rating went to A, the bonds can be
purchased at

Stated Rate Required Rate of Return

10% = 10% No Premium, No Discount
10% < 11% At Discount
10% > 9% At Premium (Lower market rate due
because the company is seen as less risky)
Zero-Coupon Bond Valuation

Zero-Coupon Bond Value= PV of Face Value only

*Rate of Return 10% vs 0% Stated <Sold at deep discount>

A 10-year zero coupon bond with a par value of P1,000 is

traded in the market. It is expecting a 9% returns in the market.
How much is the Value of bonds?

Value = P1,000 x 0.4244= P422.41

Face Value= P1,000

Purchase Price 422.41
Investor’s Income P577.56
 MORTGAGE MARKETS

WHAT ARE MORTGAGE MARKETS?

Mortgage are long-term loans secured by real estate. Both individuals and businesses
obtain mortgage loans to finance real estate purchases.

A developer may obtain a mortgage loan to finance the construction of the office building,
or a family may obtain a mortgage loan to finance the purchase of a home. In both cases,
the loan is amortized. The borrower pays it off over time in some combination of principal
and interest payments that result in full payment of the debt by maturity.

CHARACTERISTICS OF RESIDENTIAL MORTGAGE

The modern mortgage lender has continued to refine the long-term loan to make it more
desirable to borrowers. Even in the past 20 years, both the nature of the lenders and the
instrument have undergone substantial changes. One of the biggest changes is the
development of an active secondary market for mortgage contracts.

The mortgage market has become very competitive in recent years. Twenty years ago, the
savings and loan institution and mortgage department of large banks originated most
mortgage loans. Currently, there are many loan production offices that complete real estate
financing. Some of these offices are subsidiaries of banks, and others are independently
owned. As a result of a competition for mortgage loans, borrowers can choose from a
variety of terms and options.

A. MORTGAGE INTEREST RATES

One of the most important factors in the decision of the borrowers of how much and from
whom
to borrow is the interest rate of the loan.

There are three important factors that affect the interest rate of the loan. These are:
1. Current term market rates
Long term market rates are determined by the supply of and demand for long term
funds, which are in the turn affected by a number of global, international, and
regional factors. Mortgage rates tend to stay above the less risky treasury
bonds most of the time but tend to track along with them.

2. Term of life of the mortgage

Generally, long term mortgages have higher interest rates than short term. The
usual
 mortgage lifetime is 15-30 years. Because interest rate risk falls as the term to
maturity decreases, the interest rate on the 15-year loan will be substantially
less than
on the 30-year loan.

3. Number of Discount Points Paid

Discount points (or simply points) are interest payments made at the beginning of a
loan. A loan with one discount point means that the borrower pays a 1% of the loan
amount at closing, the moment when the borrower signs the loan paper and
receives
the proceeds of the loan. In exchange for points, the lender reduces the interest rate
on the loan. In considering whether to pay the points, the borrower must determine
whether the reduced interest rate over the life of the loan fully compensates for the
increased up-front expense. To make this determination, borrowers must take into
account how long they will hold on the loan. Typically, discount points should not be
paid if the borrower will pay off the loan in five years or less. This break-even point is
not surprising since the average home sells every five years.

B. LOAN TERMS
Mortgage loan contracts contain many legal and financial terms, most of which protect the
lender from financial loss.

C. COLLATERAL
One characteristic common to mortgage loans is the requirement that collateral, usually the
real
estate being financed, be pledged as security.

D. DOWN PAYMENT
To obtain a mortgage loan, the lender requires the borrower to make a down payment on
the
property, that is to pay a portion of the purchase price. The balance of the purchase price is
paid
by the loan proceeds. Down payments (like liens) are intended to make the borrower less
likely
to default on the loan. A borrower who does not make a down payment could not walk
away from the house and the loan and lose nothing. Furthermore, if real estate prices drop
even a small amount, the balance due on the loan will exceed the value of the collateral.
The down payment reduces moral hazard for the borrower. The amount of down payment
depends on the type of mortgage loan. Many lenders require that the borrower pay 5% of
the purchase price; in other situations, up to 20% may be required.

E. PRIVATE MORTGAGE INSURANCE (PMI)

Private Mortgage Insurance (PMI) is an insurance policy that guarantees to make up any
discrepancy between the value of the property and the loan amount, should a default
occur. For example, if the balance on your loan was P 120,000 at the time of default and
the property was worth only P100,000, PMI would pay the lending institution a P20,000.
The default still appears on the credit record of the borrower, but the lender avoids
sustaining the loss. PMI is usually required on loans that have less than 20% down
payment. If the loan-to-value ratio falls because of payments being made or because the
value of the property increases, the borrower can request that the PMI requirement be
dropped. PMI usually costs between P200 and P300 per month for a P100,000 loan.

F. BORROWER QUALIFICATION
Before granting a mortgage loan, the lender will determine whether the borrower classifies
for it. Qualifying for a mortgage loan is different from qualifying for a bank loan because
most lenders sell their mortgage loans to one of a few government agencies in the
secondary market. These agencies establish very precise guidelines that must be followed
before they will accept the loans. If the lender gives a mortgage loan to a borrower who
does not fit these guidelines, the lender may not be able to resell the loan. That ties up the
lender’s funds. Banks can be more flexible with loans that be kept on the bank’s own
books.

AMORTIZATION OF MORTGAGE LOAN

Mortgage loan borrowers generally agree to pay a monthly amount of principal and interest
that will be fully amortized by its maturity. “Fully amortized” means that payments will pay
off the outstanding indebtedness by the time the loan matures.

TYPES OF MORTGAGE LOANS

1. Conventional Mortgages
These are originated by banks or other mortgage lenders but are not guaranteed by
government or government-controlled entities. Most lenders though now insure many
conventional loans against default or they require the borrower to obtain private mortgage
insurance on loans.

2. Insured Mortgages
These mortgages originated by banks or other mortgage lenders but are guaranteed by
either the government or government-controlled entities.

3. Fixed-rate Mortgages
In fixed-rate mortgages, the interest rate and the monthly payment do not vary over the life
of the mortgages.

4. Adjustable-Rate Mortgages (ARMs)

The interest rate on adjustable-rate mortgage is tied to some market interest rate (e.g.,
Treasury bill rate) and therefore changes over time. ARMs usually have limits, called caps,
on how high (or low) the interest rate can move in one year and during the term of the loan.

5. Graduated-Payment Mortgage (GPMs)

These mortgages are useful for home buyers who expect their incomes to rise. The GPM
has lower payments in the first few years, then payments rise. The early payment may not
even be sufficient to cover the interest due, in which case the principal balance increases.
As time passes, the borrower expects income to increase so that higher payment will not
be too much of a burden.

6. Growing Equity Mortgage (GEMs)

With a GEM, the payments will initially be the same as on a conventional mortgage. Over
time, however, the payment will increase. This increase will reduce the principal more
quickly than the conventional payment stream would.
7. Shared Appreciation Mortgage (SAMs)
In a SAM, the lender lowers the interest rate in the mortgage in exchange for a share of
any appreciation in the real estate (if the property sells for more than a stated amount, the
lender is entitled to a portion of the gain).

8. Equity Participating Mortgage (EPM)

In EPM, the outside investor shares in the appreciation of the property. This investor will
either provide a portion of the purchase price of the property or supplement the monthly
payment. In return, the investor receives a portion of any appreciation of the property. As
with the SAM, the borrower benefits by being able to qualify for a larger loan than without
such help.

9. Second Mortgages
These are loans that are secured by the same real estate that is used to secure the first
mortgage. The second mortgage is junior to the original loan which means that should a
default occur, the second mortgage holder will be paid only after the original loan has been
paid off, if sufficient funds remain.

10. Reverse Annuity Mortgages (RAMs)

In a RAM, the bank advances funds to the owner on a monthly schedule to enable him to
meet living expenses, thereby increasing the balance of the loan which is secured by the
real estate. The borrower does not make payments against the loan and continues to live
in his home. When the borrower dies, the estate sells the property to pay the debt.

The various mortgages types are summarized in the figure below.

Conventional Mortgage -not guaranteed

-usually requires private mortgage
insurance
- 5% to 20% down payment
Insured Mortgage - guaranteed
- low or zero down payment
Fixed rate Mortgage -The longer the term, the more interest that
you pay. Someone with a 15-year term, for
example, will pay less in interest than
someone with a 30-year fixed-rate
mortgage.
Adjustable-rate mortgage (ARM) -interest rate is tied to some other security
and is adjusted periodically, size of
adjustment is subject to annual limits
Graduated-payment mortgage (GPM) -initial low payment increases each year
-loan amortization in 30 years
Growing-equity mortgage (GEM) -initial low payment increases each year
-loan amortization in 30 years
Shared-appreciation mortgage (SAM) -in exchange for providing a low interest
rate, the lender shares in any appreciation
in value of the real estate
Equity participation mortgage (EPM) -in exchange for paying a portion of the
down payment or for supplementing the
monthly payments, an outside investor
shares in any appreciation in value of the
 real estate
Second mortgage -Loan is secured by a second lien against
the real estate
-often used for line of credit or home
improvement loans
Reverse annuity mortgage -lender disburses a monthly payment to
the borrower on an increasing balance
loan
-loan comes due when the real estate is
sold

MORTGAGE LENDING INSTITUTIONS

The institutions that provide mortgage loans to familiar and business and their share in the
mortgage market are as follows:

Mortgage tools and trust 49%

Commercial banks 24%
Government agencies and others 15%
Life insurance companies 9%
Savings and loans associates 9%
Source: Federal Revenue Bulletin, 2018

Many of the institutions making mortgage loans do not want to hold large portfolios of long-
term securities. Commercial loans, thrifts and most other loan organizations do make
money through fees that they earn for packaging loans for other investors to hold. Loans
organization fees are typically 1% of the loan amount, through this varies with the market.

In the Philippines,
The Philippine government, through different agencies, offers affordable housing loans that
make it possible for the working Filipino to grab the keys to their own home. Essentially, the
government housing loans offered can be availed through memberships or monthly
contributions. But which of them would best suit your lifestyle and financial state? To make
it easier, here’s a rundown of four qualified agencies offering house loans that could be the
perfect fit.

1. SSS -When you think of the SSS, it’s usually the pension you’d get after retirement that
you think of. SSS offers more than a monthly retirement benefit, they also provide benefits
for business and housing loans.

2. GSIS- Created by way of Commonwealth Act No. 186 that was passed in 1936, and
later on amended under Republic Act No. 8291 in 1997, the Government Service
Insurance System (GSIS) is a social security system for government employees. It ensures
members against particular contingencies in exchange for their monthly contributions. It
does offer housing loan products via these two means.
A. GSIS Family Bank Home Loans
 B. Home Loans via PAG-IBIG

3. The Housing Development Mutual Find (HDMF)—better known as the Pag-IBIG Fund
—is one of the most familiar and popular options when it comes to housing loans. They
give financial assistance to its members looking to purchase their own home. Pag-IBIG
has also been tapped by GSIS for house loan options since GSIS stopped its loan
operations in May of 2016.

4. The National Home Mortgage Finance Corporation (NHMFC) was built in response to
the need for increasing the availability of affordable housing loans. Unlike SSS or Pag-
IBIG Fund, the NHMFC is catered to the secondary market that operates or finances for
home mortgages.

There is actually only one loan program that NHMFC offers which is the Housing Loan
Receivables Program (HLRP). This is directed more to financial institutions, developers,
LGUs, cooperatives and other private sectors. They’ve created a program to help these
organizations have more to lend to potential homeowners by liquidating their qualified
housing receivables.

5. The Social Housing Finance Corporations (SHFC) was born out of the transfer of loan
programs which was originally run by the National Home Mortgage Finance Corporation
(NHMFC). The SHFC is concentrated on providing housing loans and financing for low-
income families and informal settlers. Just like the NHMFC, the SHFC works with
secondary markets such as LGUs undergoing housing projects to help those with lower
incomes gain their own home.

6 Top Bank Housing Loan Providers in the Philippines

https://www.lumina.com.ph/news-and-blogs/blogs/6-top-bank-housing-loan-providers-in-
the-philippines/

When it comes to financing a housing loan in the Philippines, many people automatically
think of the PAG-IBIG Fund. Usually, a bank housing loan is seen as a backup option if the
PAG-IBIG loan doesn't work out for various reasons.

However, opting for a bank loan to buy a house and lot Philippines isn't a bad choice,
especially when time is a factor. Oftentimes, you can't afford to miss out on a great real
estate opportunity and need to act quickly. Plus, banks often offer loans that are
comparable to PAG-IBIG loans, with some even providing lower interest rates and loan
maturity.

But, with hundreds of banks and financial institutions registered with the Bangko Sentral ng
Pilipinas, choosing the right bank for a housing loan can be mentally draining. So, allow us
to give you a list of what we consider the top banks for housing loans in the Philippines.

Securing a home loan from banks is a crucial step towards turning your dream of owning a
house and lot into a reality. So, let us explore their interest rates, repayment terms, and
additional perks to find the ideal financing solution that suits your needs.

Here is the updated list of six (6) best housing loans in the country.

1. Banco De Oro (BDO)

BDO offers competitive interest rates and flexible loan terms for housing loans in the
Philippines. They also offer attractive loan-to-value ratios and allow for convenient online
application and processing.

Loan Features
Loanable amount: Minimum of P300,000 for lot only while P500,000 for house and lot or
condominium unit

Maximum loan amount: 90 percent of the house and lot property’s appraised value or 70
percent for the lot only

Interest rates for existing clients: 6.75 percent (1-2 years), 7.50 percent (3 years), and 7.88
percent (5 years)

Interest rates for new clients: 7 percent (1-2 years), 7.75 percent (3 years), and 8.25
percent (5 years)

Loan term: Up to 20 years

Quick approval time of five banking days

Can be used for house and lot purchase, vacant lot, or condominium unit

Can also be used for home construction, renovation, reimbursement of acquisition cost, or
refinancing
2. Maybank
Maybank also offers competitive interest rates and flexible loan terms for housing loans.
They provide customized financing solutions, including fixed-rate and adjustable-rate
loans, with favorable loan-to-value ratios. Plus, they offer a hassle-free application process
and convenient repayment options.

Maybank Home Loan Features

Loanable amount: Minimum of P500,000

Maximum loan amount: 90 percent of the house and lot property’s value or for lot only

Interest rates: 6.5 percent (1-2 years), 7.25 percent (3 years), and 8 percent (5 years)

Loan term: Up to 25 years

Can be used for house and lot, vacant lot, or condominium unit purchase

Can be used for home equity, home construction, or refinancing

3. Rizal Commercial Banking Corporation (RCBC)

If you prefer an RCBC home loan, you can also enjoy perks like competitive interest rates
and flexible loan terms for housing loans.

Loan Features
Loanable amount: Minimum of P300,000

Maximum loan amount: 90 percent of the house and lot property’s value or for lot only

Interest rates: 6.38 percent (1-2 years), 6.88 percent (3 years), and 7.38 percent (5 years)

Loan term: Up to 25 years

Can be used for a house and lot or vacant lot purchase, and home renovation

Can also be served as a multi-purpose loan or used for home refinancing

4. Bank of Commerce (BOC)

Whether you’re a local employee, self-employed, or overseas worker, BOC can also give
you reasonable housing loan rates, loan terms, and repayment options.

Loan Features
Loanable amount: Minimum of P500,000

Maximum loan amount: 90 percent of the house and lot property’s appraised value or for
lot only

Interest rates: 7 percent (1-2 years), 7.5 percent (3 years), and 7.75 percent (5 years)

Loan tenure: Up to 20 years

Purchase of house and lot, townhouse, or condo unit

Construction of your dream house on a lot you already owned

Major repair, home improvement, or expansion of an existing house

Refinancing or take-out of an existing housing loan

5. Unionbank of the Philippines (UBP)

Meanwhile, UBP offers various loan options, including fixed-rate and adjustable-rate loans,
allowing borrowers to choose what suits them best.

Unionbank Housing Loan Features

Loanable amount: Minimum of P500,000

Maximum loan amount: 90 percent of the house and lot property’s value or for lot only

Interest rate: 9.50 percent (1-5 years)

Loan term: Up to 25 years

For purchasing of a house and lot property or condo unit, house construction, lot purchase,
home refinancing, renovation or expansion, and reimbursement.

6. AllBank
AllBank's housing loans also come with easy application processes and personalized
customer service.

Loan Features
Maximum loan amount: 90 percent of the house and lot property’s value or for lot only

Interest rates: 6.88 percent (3 years) and 7.88 percent (5 years)

Purchase or construct your home, renovation of your existing house, refinancing your
existing mortgage, or just simply for additional investment

For more details about AllBank’s home loan, you can contact them via phone at +63 2
8255-2265 or email: info@allbank.ph / customercare@allbank.ph. You can also visit their
office at 2/F AllBank Building, EDSA corner Cornell Street, Barangay Wack Wack,
Mandaluyong City, Philippines.

SECURITIZATION OF MORTGAGES
Intermediaries save several problems when trying to sell mortgages to the secondary
market; that is lenders selling the loans to another investor. These problems are:
a. Mortgages are usually too small to be wholesale instruments.
b. Mortgages are not standardized. They have different terms to maturity, interest rates and
contract terms. Thus, it is difficult to bundle a large number of mortgages together.
c. Mortgage loans are relatively costly to service. The lenders must collect monthly
payments, often advances payment of property taxes and insurance premiums and service
reserve accounts.
d. Mortgages have unknown default risk. Investors in mortgages do not want to spend a lot
of time and effort in evaluating the credit of borrowers.

The above problems inspired the creation of mortgage-backed security.

Mortgage-backed security is a security that is collateralized by a pool of mortgage loans.
This is known as securitized mortgage. Securitization is the process of transforming illiquid
financial assets into marketable capital market instruments.
The most common type of mortgage-backed security is the mortgage pass through, a
security that has the borrower’s mortgage pass through the trustee before being disbursed
to the investors in the mortgage- pass through. If the borrower pre-pay their loans,
investors receive more principal than expected.

Impact of Securitized Mortgage on the Mortgage Market

Mortgage-backed securities (also called securitized mortgages) have been growing in
popularity in recent years as institutional investors look for appreciative investment
opportunities that compete for funds with government notes bonds, corporate bonds and
stock.
Securitized mortgages are low-risk securities that have higher yield than comparable
government bond and attract funds from around the world.

What benefits are derived from Securitized Mortgage (SM)?

The benefits are:
a. SM has reduced the problems and risks caused by regional lending institutions’
sensitivity to
local economic fluctuations.
b. Borrowers now have access to the national capital market.
c. Investors can enjoy the low-risk and long-term nature of investing in mortgages without
having to service the loan.
d. Mortgage rates are now more open to national and international influences. As a
consequence, mortgage rates are more volatile than they were in the past.
Examples:

(a) If a 9%, P100,000 loan has a balance of P83,724 and an annual payment
of P13,965 is to be made, what will the allocation of principal and interest be?
(Round-off to the nearest peso)
a. P4,965 interest, P9,000 principal
b. P6,430 interest, P7,535 principal
c. P7,535 interest, P6,430 principal
d. P9,000 interest, P4,965 principal

Answer:
Interest = P83,724.00 x 0.09 = P7,535
Principal = P13,965 – P7,535 = P6,430

(b) Sherry Smart is buying a P350,000 home and will pay the mortgage
monthly for 30 years. She has a good credit score and has qualified for a
5.125% loan interest. How much will she be paying monthly for the home?
a. P975.88
b. P1,318.69 N= 30 x 12= 360
c. P1,905.70 R= 5.125/ 12= 0.427083%
d. P2,013.67

Answer:
PMT P350,000
= 1 – (1.004270833)-360
0.004270833
= P1,905.70

(c) Abra Nico obtains a P500,000, 15-year fixed-rate mortgage. The annual
interest rate is 6.25 percent. In addition to the principal and interest paid, Abra
Nico must pay P1,500 a month into an escrow account for insurance and
taxes. What is the total monthly payment?
(a) P4,287.11
(b) P5,787.11
(c) P31,250.57 N= 15 x 12= 180
R= 6.25%/ 12= 0.52083333333%
(d) Answer not given
Answer:
PMT P500,000 + 1,500
= 1 – (1.00520833)-180
0.00520833
= P5,787.11

(d) Abra Nico obtains a P500,000, 15-year fixed-rate mortgage. The annual
interest rate is 6.25 percent payable quarterly. In addition to the principal and
interest paid, Abra Nico must pay P7,500 a month into an escrow account for
insurance and taxes. What is the total quarterly payment of Abra Nico?
a. P12,901.59
b. P20,401.59
c. P52,325.62
d. Answer not given

Answer:
PMT P500,000 +
= 7,500
1 – (1.015625)-60
0.015625
= P5,787.11

(e) Grace Sia purchase a P500,000 house and you pay 20 percent down.
Ms. Sia obtains a fixed-rate mortgage where the annual interest rate is 9.0
percent and there are 180 monthly payments. What is the monthly payment?
a. P4,057.07
b. P5,071.33
c. P36,000.01
d. Answer not given

Answer:
PMT P400,000
= 1 – (1.0075)-180
0.0075
= P4,057.07

(f) Bea could take out a 15-year mortgage at a 6.0 percent per annum
 payable monthly rate on a P200,000 mortgage amount, or she could finance
the purchase with a 30-year mortgage at a 7.5 percent annual rate payable
monthly. How much total interest over the entire mortgage period could she
save by financing her home with the 15-year mortgage?
(a) P11,865.03
(b) P199,139.12
(c) P199,645.99
(d) Answer not given

Answer:
PMT P200,000 x 180
= 1 – (1.005)-180
0.005
= P303,788.46

PMT P200,000 x 360

= 1 – (1.00625)-360
0.00625
= P503,434.45

Difference = P503,434.45 – P303,788.46

= P199,645.99

(g) Ms. Joyce Co bought a house for P300,000. She paid 20 percent down
but decided to finance closing costs of 5 percent of the mortgage amount. If
Ms. Co took out a 30-year fixed-rate mortgage at a 7.5 percent annual interest
rate payable monthly, how much interest will Ms. Co pay over the life of the
mortgage?
a. P382,327.20
b. P455,151.67
c. P462,041.12
d. Answer not given

Answer:
PMT P252,000
 = 1 – (1.00625)-360
0.00625
= P1,762.02

Interest payment = (P1,762.02 x 360) – (300,000 x 0.80 x 1.05) = P382,327.20

(h) Ms. Marge Gage can obtain a P300,000, 30-year fixed-rate mortgage at a
rate of 8.0 percent per annum payable annually with zero points or a rate of
7.0 percent with 2.50 points. If you will keep the mortgage for 30 years, what is
the net present value of paying the points?
P13,080.86
P23,370.18
P27,153.94
Answer not given

Answer:
No Points:
PMT P300,000
= 1 – (1.006666667)-360
0.006666667
= P2,201.29

Pay Points:
PMT P300,000
= 1 – (1.00583333)-360
0.00583333
= P1,995.91

Pmt savings = P2,201.29 – P1,995.91 = P205.38

NPV of points
= 205.38 1 – (1.00583333)-360 - (P300,000 x
0.025)
0.00583333
= P23,370.18
 (i) Shek borrows P10,000 to pay for your college tuition. The loan is
amortized over three years with an interest rate of 18%. What is your
remaining balance at the end of Year Two? (Round-off to the nearest peso)
a. P7,201
b. P4,599
c. P3,898
d. P3,303

Answer
1− ( 1+ ⅈ )− n
PVAN= AMT ( ⅈ )
1− ( 1.18 )−3
10,000= AMT ( 0.18 )
AMT = 4,599

Annual Interest Principal Balance

Payment Payment Payment
10,000
Year 1 4,599 1,800.00 2,799.00 7,201
Year 2 4,599 1,296.18 3,302.82 3,898

(j) Ms. Joyce Co bought a house for P300,000. She paid 20 percent down
but decided to finance closing costs of 5 percent of the mortgage amount. If
Ms. Co took out a 30-year fixed-rate mortgage at a 7.5 percent annual interest
rate payable monthly, how much balance would she have after 5 years?
a. P146,278.80
b. P238,435.86
c. P253,653.20
d. Answer not given

Answer:
PMT P252,000
= 1 – (1.00625)-360
0.00625
= P1,762.02
 PV = P1,762.02 * 1 – (1.00625)-300
0.00625
= P238,435.86

11. Miss Jaren Topy is looking to buy a home in Antipolo City. The most she can afford
to pay in total is P18,000 per month. Yearly property taxes will be about P7,500 and
insurance is P250 per month. There are no other costs. If his parents give him
P500,000 for a down payment, what are the most he can pay for a house with a 20-
year mortgage if the interest rate is 7.50 percent?

Answer:

Max monthly payment = P18,000 – (P7,500/12) – P250 = P17,125

PVAN P17,125 * 1 – (1.00625)-240 + P500,000

= 0.00625
= P2,625,762.75

12. Miss Angel Lina is looking to buy a home in Batangas. The most he can afford to
pay in total is P180,000 per year. Yearly property taxes will be about P7,500 (escrowed
monthly) and insurance is P250 per month. There are no other costs. If mortgage rates
are 7.50 percent for a 30-year fixed-rate mortgage, how large can his mortgage be?

Answer:
Max annual payment = P180,000 – (P3,000 x 12) – (P250 x 12) = P141,000

PVAN P141,000 1 – (1.075)-30

= 0.075
= P1,665,264.46

13. Karla Pala purchased a P325,000 townhome and pays 25 percent down. She
obtained a 30-year fixed-rate mortgage with an annual interest rate of 6.6 percent.
After five years you refinance the mortgage for 25 years at a 6.0 percent annual
interest rate. After you refinance, what is the new monthly payment?

Answer:
To get the balance after 5 years
 PMT P243,750
= 1 – (1.0055)-360
0.0055
= P1,556.73

PVAN P1,556.73 1 – (1.0055)-300

= 0.0055
= P228,437.36

The monthly payment for the refinancing

PMT P228,437.36
= 1 – (1.005)-300
0.005
= P1,471.83

14. Maria Sinukuan purchased a P100,000 house using a 30-year mortgage

obtained from a local bank. The mortgage rate is 8.25 percent per annum
payable monthly. Maria will make a down payment of 20 percent of the purchase
price.
Required:
a. What are the monthly payments Maria Sinukuan on her mortgage?
b. What is the amount of interest and principal paid in the 25th payment?
c. What is the amount of interest and principal paid in the 200th payment?
d. What is the total amount of interest paid over the life of Maria’s mortgage?

Answer:
a. For the monthly payment on the mortgage:
PMT P100,000(0.80)
= 1 – (1.006875)-360
0.006875
= P601.01

b. The 25th payment (335 payments remaining) of P601.01 is split as follows: P540.88
to interest and P60.13 to the principal.
PVAN = P601.01 1 – (1.006875)-335
0.006875
 = P78,613.26

Interest P78,613.26 x 0.0825 x 30/360

payment = = P540.47
Principal P601.01 – P540.47 = P60.54
payment =

c. The 200th payment of P601.01 is split as follows: P364.32 to interest and P236.69
to the principal.
PVAN = P601.01 1 – (1.006875)-160
0.006875
= P58,210.43

Interest P58,210.43 x 0.0825 x 30/360

payment = = P400.20
Principal P601.01 – P400.20 = P200.81
payment =

d. Total interest paid = (P601.01 x 360) – P80,000 = P136,363.60

15. Ressa Yo is to purchase a P150,000 house using a 15-year mortgage

obtained from BCP. The mortgage rate offered is 6.0 percent. Miss Yo will make a
down payment of 20 percent of the purchase price.

Required:
a. What are the monthly payments on this mortgage?
b. Construct the amortization schedule for the first five payments.

Answer:
a. For your mortgage:

PMT P150,000(0.80)
= 1 – (1.005)-180
0.005
= P1,012.63
 b. Amortization table – first five payments

Year Payment Interest Principal Balance

0 120,000.00
1 1,012.63 600.00 412.63 119,587.37
2 1,012.63 747.42 265.21 119,322.16
3 1,012.63 745.76 266.87 119,055.29
4 1,012.63 744.10 268.53 118,786.76
5 1,012.63 742.42 270.21 118,516.55

16. Erika plans to purchase a P500,000 house using either a 30-year mortgage
obtained from your local savings bank with a rate of 7.25 percent or a 15-year
mortgage with a rate of 6.50 percent. Erika will make a down payment of 20 percent of
the purchase price.

Required:
a. Determine the amount of interest and principal paid on each mortgage. What is
the difference in interest paid?
b. Determine the monthly payments on the two mortgages. What is the difference in
the monthly payment on the two mortgages?

Answer:
For either mortgage, you will make a down payment of 20 percent of the
purchase price: or a down payment of P40,000 (0.20 x P200,000) at closing and
borrow P160,000 through the mortgage.

a.
PMT = P400,000
1 – (1.006041667)-360
0.006041667
= 2,728.71

Interest paid = P2,728.71 x 360 = P982,335.60 –

P400,000.00
= P582,335.60

PMT = P400,000
1 – (1.00541667)-180
 0.00541667
= P3,484.43

Interest P3,484.43 x 180 = P627,197.40

paid = – P400,000.00
= P227,197.40

The difference in interest paid is P355,138.20 (P582,335.60 – P227,197.40)

b. The difference in monthly payment is P755.72 (P3,484.43 – P2,728.71)

17. Anna San plans to purchase a P750,000 house using a 5-year mortgage
obtained from BDC. The mortgage rate offered is 5.4 percent per annum payable
quarterly. Anna will make a down payment of 10 percent of the purchase price.

Required:
a. What are the monthly payments of Anna on the mortgage?
b. Construct the amortization schedule for the mortgage.
c. How much total interest is paid on this mortgage?

Answer
◦ The monthly payment is
PMT P750,000(0.90)
= 1 – (1.0135)-20
0.0135
= P38,736.97

◦ The amortization table will appear as follows

 Year Payment Interest Principal Balance
0 675,000.00
1 38,736.97 9,112.50 29,624.47 645,375.53
2 38,736.97 8,712.57 30,024.40 615,351.13
3 38,736.97 8,307.24 30,429.73 584,921.40
4 38,736.97 7,896.44 30,840.53 554,080.87
5 38,736.97 7,480.09 31,256.88 522,823.99
6 38,736.97 7,058.12 31,678.85 491,145.14
7 38,736.97 6,630.46 32,106.51 459,038.63
8 38,736.97 6,197.02 32,539.95 426,498.69
9 38,736.97 5,757.73 32,979.24 393,519.45
10 38,736.97 5,312.51 33,424.46 360,094.99
11 38,736.97 4,861.28 33,875.69 326,219.30
12 38,736.97 4,403.96 34,333.01 291,886.29
13 38,736.97 3,940.46 34,796.51 257,089.79
14 38,736.97 3,470.71 35,266.26 221,823.53
15 38,736.97 2,994.62 35,742.35 186,081.18
16 38,736.97 2,512.10 36,224.87 149,856.30
17 38,736.97 2,023.06 36,713.91 113,142.39
18 38,736.97 1,527.42 37,209.55 75,932.85
19 38,736.97 1,025.09 37,711.88 38,220.97
20 38,736.97 515.98 38,220.97 (0.00)
99,739.38 675,000.00

◦ The total interest paid is P99,739.38

18. A borrower took out a 15-year fixed-rate mortgage of P2,250,000 at a 9.0 percent
annual rate. After five years, he wishes to pay off the remaining balance. Interest rates
have by then fallen to 7 percent. How much must he pay to retire the mortgage?

Answer:
PMT P2,250,000
= 1 – (1.0075)-180
0.0075
= P22,821

PVAN P22,821 1 – (1.0075)-120

= 0.0075
= P1,801,528.37
 19. Anna plans to purchase a house for P200,000 using a 30-year mortgage
obtained from your local bank. Anna will not pay off the mortgage early.
a. Your bank offers you the following two options for payment:
Option 1: Mortgage rate of 5.5 percent and zero points.
Option 2: Mortgage rate of 5.35 percent and 1.5 points.
Which option should you choose?

b. Your bank offers you the following two options for payments:
Option 1: Mortgage rate of 5.35 percent and 1 point.
Option 2: Mortgage rate of 5.25 percent and 2 points.

Which option should you choose?

Answer:
a. If Option 2 is chosen you pay P200,000 x 0.015 = P3,000 in points and receive
P197,000 at closing (P200,000 – P3,000), although the mortgage principal is
P200,000. To determine the best option, we first calculate the monthly payments for
both options as follows

Option 1: PMT
PVAN = PMT 1 – (1 + i)-n
i
P200,0 PMT 1 – (1.004583333)-360
00 = 0.00458333
PMT = P1,135.58

Option 2:
PVAN PMT 1 – (1 + i)-n
= i
P156,0 PMT 1 – (1.004458333)-360
00 = 0.004458333
PMT = P1,116.83
 In exchange for P3,000 upfront, Option 2 reduces your monthly mortgage payments
by P18.75

PVAN = PMT 1 – (1 + i)-n

i
= P18.75 1 – (1.004458333)-360
0.004458333
= P3,357.73

Option 2 is the better choice. The present value of the monthly savings, P3,357.73, is
greater than the points paid up front, P3,000.

b. If Option 1 is chosen you pay P200,000 x 0.01 = P2,000 in points and receive
P198,000 at closing (P200,000 – P2,000), although the mortgage principal is
P200,000. If Option 2 is chosen you pay P200,000 x 0.02 = P4,000 in points and
receive P196,000 at closing (P200,000 – P4,000). The difference in savings on the
points is P2,000.

To determine the best option, we calculate the monthly payments for both options as
follows

Option 1:

PVAN = PMT 1 – (1 + i)-n

i
P200,0 PMT 1 – (1.004458333)-360
00 = 0.004458333
PMT = P1,116.83

Option 2:
PVAN = PMT 1 – (1 + i)-n
i
P200,0 PMT 1 – (1.004375)-360
00 =
 0.004375
PMT = P1,104.41

In exchange for P2,000 upfront, Option 2 reduces your monthly mortgage payments
by P12.42. The present value of these savings (evaluated at 5.25 percent) over the 30
years is

PVAN = PMT 1 – (1 + i)-n

i
= P12.42 1 – (1.004375)-360
0.004375
= P2,249.16

Option 2 is the better choice. The present value of the monthly savings, P2,249.16, is
greater than the points paid up front, P2,000.

19. You plan to purchase a house for P1,750,000 using a 15-year mortgage
obtained from your local bank. You will make a down payment of 25 percent of
the purchase price. You will not pay off your mortgage early.

a. Your bank offers you the following two options for payment:
Option 1: Mortgage rate of 5 percent and zero points.
Option 2: Mortgage rate of 4.75 percent and 2 points.

Which option should you choose?

b. Your bank offers you the following two options for payments:
Option 1: Mortgage rate of 4.85 percent and 2 points.
Option 2: Mortgage rate of 4.68 percent and 3 points.

Which option should you choose?

Answer:
You will make a down payment of 25 percent of the purchase price, or you will make a
down payment of P437,500 (0.25 x P1,750,000) at closing and borrow P1,312,500
through the mortgage.

a. If Option 2 is chosen you pay P1,312,500 x 0.02 = P26,250 in points and receive
P1,286,250 at closing (P1,312,500 - P26,250), although the mortgage principal is
P1,312,500. To determine the best option, we first calculate the monthly payments for
both options as follows

Option 1:
PVAN = PMT 1 – (1 + i)-n
i
P1,312, PMT 1 – (1.004166666)-180
500 = 0.004166666
PMT = P10,379.17

Option 2:
PVAN = PMT 1 – (1 + i)-n
i
P1,312, PMT 1 – (1.003958333)-180
500 = 0.003958333
PMT = P10,209.04

In exchange for P26,250 upfront, Option 2 reduces your monthly mortgage payments
by P170.12. The present value of these savings (evaluated at 4.75 percent) over the
15 years is

PVAN = PMT 1 – (1 + i)-n

i
= P170.12 1 – (1.003958333)-360
0.003958333
= P21,871.43
 Option 1 is the better choice. The present value of the monthly savings, P21,871.43,
is less than the points paid up front, P26,250.

b. If Option 1 is chosen you pay P1,312,500 x 0.02 = P26,250 in points and receive
P1,286,250 at closing (P1,312,500 - P26,250), although the mortgage principal is
P1,312,500. If Option 2 is chosen you pay P1,312,500 x 0.03 = P39,375 in points and
receive P1,273,125 at closing (P1,312,500 - P39,375). The difference in savings on the
points is P13,125.

To determine the best option, we calculate the monthly payments for both options as
follows

Option 1:

PVAN = PMT 1 – (1 + i)-n

i
P1,312, PMT 1 – (1.004041666)-180
500 = 0.004041666
PMT = P10,276.90

Option 2:

PVAN = PMT 1 – (1 + i)-n

i
P1,312, PMT 1 – (1.0039)-180
500 = 0.0039
PMT = P10,161.70

In exchange for P13,125 upfront, Option 2 reduces your monthly mortgage payments
by P115.20. The present value of these savings (evaluated at 4.68 percent) over the
15 years is
 PVAN = PMT 1 – (1 + i)-n
i
= P115.20 1 – (1.0039)-360
0.0039
= P14,879.44

Option 2 is the better choice. The present value of the monthly savings, P14,879.40,
is greater than the points paid up front, P13,125.00.
ASSIGNMENT 5
True or False.
1. Prime rates are offered to valued clients by a particular financial institution.
2. A zero-coupon bond corporate bonds are traded in the secondary market.
3. A zero-coupon bond is a bond that pays no interest and is offered (and initially sells) at
par.
4. The market rate of interest is used as a discount rate used to value a bond.
5. The yield to maturity on a bond is the required return on the bond.
6. Bonds issued by large well known corporations in a large volume are illiquid because
most buyers hold these bonds until maturity.
7. The primary investors in bond markets are institutional investors such as commercial
banks, bond mutual funds, pension funds, and insurance companies.
8. There is an direct relationship between bonds quality ratings and their required rates of
return.
9. If the required rate of return on a bond is greater than its coupon interest rate and will
remain above that rate, then the market value of the bond will always be above its par
value until the bond matures at which time its market value will equal its par value.
10. The fixed payments by the borrower are made in equal installments that consist of
principal and interest based on the outstanding balance of the mortgage.
11. The payments on the mortgage contract depend on the agreement between the
mortgagor and the mortgagee.
12. Borrower originate mortgages and sell those mortgages.
13. Lending institution borrow money through the creation of mortgages that are used to
invest in real estate.
14. A company considering the purchase of a Php1,000 bond with a 12% coupon and 15-
year maturity will buy it at a discount since the prevailing market rate is 11%.
15. Banks originate mortgages, sell them to government agencies or financial institutions,
which bundle these loans into mortgage-backed securities (MBS) that investors buy to
receive regular payments from homeowners’ principal and interest repayments.

Multiple Choices.
1. If a bond with a par value of P1,000 and stated interest of 12% was purchased at
P775 the effective rate is expected to be
a. higher than the stated rate
b. lower than the stated rate
c. equal to the stated rate
d. zero
2. If a bond with a par value of P1,000 and stated interest of 9% was purchased at
P1,350, the effective rate is expected to be
a. higher than the stated rate
b. lower than the stated rate
c. equal to the stated rate
d. zero

3. AAA Corporation is a subcontractor of the education department of the state in building

an educational institution in a province. In order to finance the project, a bond was issued
and sold. This is a form of
a. Corporate Bond
b. Government Bond
c. Municipal Bond
d. Mortgage Bond

4. BBB Inc is the largest service provider of a local government office. The company is
considering to purchase new equipment and upgrades to their existing to support their
need to enhance their facilities used in servicing the office. The bond was issued by BBB.
a. Corporate Bond
b. Government Bond
c. Municipal Bond
d. Mortgage Bond

5. A corporate bond was issued by X Corporation to an Y Corporation. From this

investment, Y Corporation will earn 5% every year for 5 years. Y Corporation has paid for
this $1,000.00 value bond for only $990.00. What do you call the 5% that will be earned
by Y Corporation?
a. coupon rate
b. cost of capital
c. cost of debt
d. cost of bond

6. CCC Corp. was offered with two bonds to investment in the debt market. First Bond is
a 10% coupon and to be paid Annually, Php1,000 par value that will mature in 10 years.
Second Bond is a 10% coupon bond paid semi-annually, Php1,000 par value that will
mature in 10 years. The required rate of return for both bonds is 10%. CCC Corp will
conclude that the bonds will cost
a. the same
b. First Bond is higher than Second Bond
c. First Bond is lower than Second Bond
d. a value that would require more information to determine

7. What is the difference between debt instrument and debt security?

a. They can be interchangeably used hence similar.
b. Not all debt instruments are debt securities, however debt securities are all debt
instruments.
c. Not all debt securities are debt instruments, however debt instruments are all debt
securities.
d. Debt instruments are negotiable and tradable debt securities.

8. The value of a bond is the present value of the

(a) dividends and maturity value.
(b) interest and dividend payments.
(c) maturity value.
(d) interest payments and maturity value.

9. A bond will sell _________ when the stated rate of interest exceeds the required rate of
return, _________ when the stated rate of interest is less than the required return, and
_________ when the stated rate of interest is equal to the required return.
(a) at a premium; at a discount; equal to the par value
(b) at a premium; equal to the par value; at a discount
(c) at a discount; at a premium; equal to the par value
(d) equal to the par value; at a premium; at a discount

10. The tax deductibility of expenses _________ their after-tax cost.

(a) increases
(b) reduces
(c) has no effect on
(d) has an undetermined effect on

Problem Solving. Round off to the nearest peso

1. AAA Corp Issued a 10-year P1,000 bond with 12% interest . If required return is 10%,
the value of the bond should be_________

2. BBB Inc issued a 7 year bond with a face value of P1,000. The bond has a stated
interest of 10%. The prevailing market rate for this type of bond is 15%. Based on the
foregoing the value of the bond should be _____
3. CCC company issued a 12-year P1,200 bond with a 11% interest for expansion. If the
required return is 9%, the value of the bond should be________

4. On January 2000, DDD Inc secured a 20-year bond at P1,000 bond with a stated
interest rate of 6.5%. On January 2, 2016, Panama Corp purchased the bond from DDD
Inc when the prevailing rate for this type of bond remains to be six and half percent.
Based on the foregoing, the value should Panama purchase the bond from DDD
_________

5. A 10-year P1,000 bond with stated interest of 10% interest paid quarterly was issued
by EEE. If after 5 years, the prevailing rate for this bond is 12%, the bond be valued at
___________

6. The effective interest rate for a bond purchased by FFF at P875 and has 5 years
before maturity with a face value of P1,000 and stated interest of 8% is___

7. As an analyst, you are asked to determine the effective interest prevailing for a bond
issued by GGG if it was purchased at P1,095, 10 years before maturity while the bond
has the following information: Face value P1,000; Interest rate- 10% payable annually;
Tenor- 15 years; Based on the foregoing, the effective rate should be about _________

8. A P1,000 bond was purchased by HHH 15 years before its maturity at P1,255 and has
a stated interest rate of 10%. The effective interest rate for this type of bond is ________

9. III also has an outstanding issue of P1,000 par value bonds with a 12% interest rate.
The issue pays interest semiannually and has 10 years remaining to maturity. Bonds of
similar risk are currently selling to yield a 10% rate of return. What is the value of these III
bonds? ___________

10. JJJ has an outstanding issue of P1,000 par value bonds with a 15% interest rate. The
issue pays interest quarterly and has 5 years remaining to maturity. Bonds of similar risk
are currently selling to yield a 15% rate of return. What is the value of these JJJ bonds?
___________

11. A corporate financial analyst named KKK must calculate the value of an investment
with an annual cash flows of P0 for the first year, P2,000 for the second year, P3,000 for
the third year, and P2,500 for the fourth year. Assuming a discount rate of 15 percent,
what is the value of this investment? ____________
12. LLL has an outstanding issue of P1,000 par value bonds with an 8% coupon interest
rate. The issue pays interest annually and has 15 years remaining to its maturity date.
Bonds of similar risk are currently yielding a 10% rate of return. What is the value of these
LLL bonds? ____________

13. If a corporation has an average tax rate of 30 percent, the approximate annual, after-
tax cost of debt for a 10-year, 8 percent, P1,000 par value bond selling at P1,150 is
____________

14. If a corporation has an average tax rate of 30 percent, what is the approximate after
cost of debt for a P1,000 par value bond selling for P1,120 that matures in 6 years and
pays 12 percent interest annually? ___________

15. MMM has been experiencing several years of financial difficulty and, thus, has
considered maintaining its dividend payment at 2.50 indefinitely. What is the value of its
common stock if the required rate of return is 8.5 percent? The risk-free rate of interest is
currently 6 percent. _____________

16. NNN Inc. is planning to expand its operations and in order to finance this strategy
they will issue bonds on January 1, 2021. The analysts of NNN Inc. was able to
determine the price based on the similar risk that surrounds an outstanding bond issue
that has 9 percent coupon rate that is due on January 1, 2036. The bonds are currently
selling at Php1,089. If the interest will be paid semi- annually, the coupon rate that should
be used is to sell at par is ______

17. OOO Inc. was offered with 3 financial instruments namely: North, West and East.
These financial instruments in the form of bond were expected to mature in 5, 8 and 17
years, respectively. North Bond has a Php1,000 par with 9% coupon rate. West Bond has
a Php100 par value with 10% coupon rate. Lastly, East Bond has Php500 par value with
coupon rate of 15%. Based on the foregoing, if OOO Inc. will purchase 100 units of each
bond, the total budgeted amount should be at least________

18. PPP Corp. was offered with two bonds to investment in the debt market. First Bond is
a 10% coupon and to be paid ANNUALLY, Php1,000 par value that will mature in 10
years. Second Bond is a 10% coupon bond paid SEMI ANNUALLY, Php1,000 par value
that will mature in 10 years. The required rate of return for both bonds is 10%. PPP Corp
will conclude that the bonds will cost ______
19. A P1,000 par value convertible bond has a conversion price of P50. It is currently
selling for P1,200, even though the bond’s coupon rate and the market rate are equal.
The common stock obtained upon conversion is selling for P27 per share. What is the
convertible bond’s conversion ratio?

20. Assume a bond with a P1,000 par value and a 12% coupon rate, 2 years remaining to
maturity, and a 10% yield to maturity. The modified duration of this bond is__

21. QQQ obtains a P2,000,000, 15-year fixed rate mortgage from Pagibig. The annual
interest rate is 6%. What is the total interest paid at the end of the 15 year term? ____

22. RRR is buying a P1,000,000 home and will pay the mortgage monthly for 20 years.
She has a good credit score and has qualified for a 5% loan interest. How much will she
be paying monthly for the home? ________

23. SSS could take our a 15-year mortgage at a 6% per annum payable monthly rate on
a P250,000 Mortgage amount or she could finance the purchase with a 30-year mortgage
at a 7.5% annual rate payable monthly. How much total interest over the entire mortgage
period could she save by financing her home with the 15-year mortgage? _________

24. TTT purchased a P500,000 house and paid 10% down. Ms Cruz obtains a fixed rate
mortgage where the annual interest rate is 9% and there are 180 monthly payments.
What is the monthly payment? _____

25. UUU borrows P25,000 to pay for your college tuition. The loa is amortized over 3
years with an interest rate of 18%. What is the remaining balance at the end of the seconf
year? _________