BES 221 engineering economy PDF

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1 | P a g eBES 221- Engineering EconomicsTopic 6: BONDBOND is a financial security note issued by businesses or corporations and by the government as a means of borrowing long-term fund. It may also be defined as a long-term note issued by the lender to the borrower stipulating the terms of repaymen...

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BES 221- Engineering Economics Topic 6: BOND BOND is a financial security note issued by businesses or corporations and by the government as a means of borrowing long-term fund. It may also be defined as a long-term note issued by the lender to the borrower stipulating the terms of repayment and other conditions. Bonds do not represent ownership of a business or corporation and therefore not entitled to share of the profits. The bondholder has no voice in the affair of the business. However, the bondholder has a more stable and secured investment than does of the holder of common or preferred stock of the business or corporation. Bonds are issued in certain amounts known as the FACE VALUE or PAY VALUE of the bond. When the face value has been repaid, normally or maturity, the bond is said to be REDEEMED or RETIRED. BOND RATE is the interest rate quoted in the bond. VALUE OF A BOND is the present worth of all the amounts the bondholder will receive through his possession of the bond. The two payments that the bondholder will receive are the following: A. Periodic payments as interest of the bond until it is redeemed. B. Single payment upon maturity of bond. This payment is usually equal to the par value of the bond. Derivation of the formula for the value of a bond:

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Examples: Problem No. 1 A company issued 50 bonds of P 1,000.00 face value each, redeemable at par at the end of 15 years. To accumulate the funds required for redemption, the firm established a sinking fund consisting of annual deposits, the interest rate of the fund being 4%. What was the principal in the fund at the end of the 12th year? Problem No. 2 A local firm is establishing a sinking fund for the purpose of accumulating a sufficient capital to retire its outstanding bonds at maturity. The bonds are redeemable in 10 years and their maturity value is P 150,000.00. How much should be deposited each year if the fund pays interest at the rate of 3%? Problem No. 3 A P 1,000,000.00 issue of 3%, 15-year bond was sold at 95%. What is the rate of interest of this investment? Problem No. 4 A man was offered a Land Bank certificate with a face value of P 100,000 which is bearing interest of 6% per year payable semi-annually and due in 6 years. If he wants to earn 8% semi-annually, how much must he pay the certificate? Problem No. 5 A P 1,000 bond which will mature in 10 years and with a bond rate of 8% payable annually is to be redeemed at par at the end of this period. It is sold at P 1,030. Determine the yield at this price. Problem No. 6 You purchase a bond at P 5,100. The bond pays P 200 per year. It is redeemable for P 5,050 at the end of 10 years. What is the net rate of interest on your investment? Problem No. 7 A P 1,000.00, 6% bond pays dividend semi-annually and will be redeemed at 110% on June 21,2004. It is bought on June 21, 2001 to yield 4% interest. Find the price of the bond.

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