Ortega, Nina Alyssa C.

October 15, 2021

03 Task Performance 2

I. PROBLEM SOLVING (10 points: 2 items x 5 points)

1. Entero Company issued bonds with a 6% nominal rate for a Php 1,000 par value bond
payable for six (6) years. The bonds were sold for P1,250. How much is the interest rate of
the said bond in the market?

(1,000)(6%) + (1,000 − 1,250/6) 1,000 + 1,300/2 x 100% = 1.63%

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2. Assume instead that Entero Company issued bonds with a 6% nominal rate for a P1,000 par

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value bond payable for 10 years. The bonds were sold for P700. How much is the interest

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rate of the said bond in the market?

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(1,000)(6%) + (1,000 − 700/10) 1,000 + 700/2 x 100% = 10.59%
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II. INTERPRETING THE NEWS (15 points: 3 items x 5 points)
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Given below are news about the events in the Philippine financial system. Your task is to
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interpret each story.

1. The Philippines once again received a credit rating upgrade from Moody’s. Its bond yields
went down.
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Interpretation:

When bond yields rise, credit rating falls, and vice versa. When bond yields fall, credit
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rating rises. It indicates that the Philippines is only considered or exposed to modest credit
risk, which is regarded as excellent - it is the best spot where investors may feel comfortable
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investing while still earning sufficient returns.

2. The Duterte administration starts to push through with its infrastructure projects. The
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government decides to hype borrowings. Government bond yields went up by 50 bps.

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 Interpretation:

It can result in a worse credit rating, which raises the risk for investors – yet high bond
yields attract higher-risk investors seeking a larger return on investment. It draws more
investors and borrowings, but it inevitably raises the country's debt.

3. San Mig Company experiences liquidity pressures due to the 2-month lockdown. Its bond
that was issued two (2) years ago with a coupon rate of 4% is now trading at 7% yield.

Interpretation:

Investors are concerned that the bonds may fail, leaving them with nothing; if the
liquidity problems remain, they will have to demonstrate that they can maintain the firm

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solvent regardless of the pandemic.

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III. CASE ANALYSES (15 points: 3 items x 5 points)
Answer each question thoroughly.

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1. Term Structure the Philippines’ slower than expected Gross Domestic Product (GDP) growth
has resulted in a flattening of the yield curve. Investors are buying long-term bonds, which
decreased its yield; thus, increasing bond prices. Short-term bonds, on the other hand, has
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remained the same.

Questions:

a. Why are bond investors buying the long-end more? Use the pure expectations theory in
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explaining your answer.

Explanation:

A flat yield curve indicates little variation in yields from short-term to long-term
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bonds. This is a sign of ambiguity. In general, pure expectation theory states that if
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annualized yields for short and long term (risk free) securities are similar, the yield curve
is flat – investors will begin to believe that interest rates will rise soon and will respond
by investing in short term bonds. However, based on current events, they would rather
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have a risk free long term bond than take a risk on a short term bond because they do
not expect rates to rise soon.

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 b. Although not all the time, why is flattening of the yield curve signifies a recession?

Explanation:

Investors keep a watch on these yields because they may lead to an inverted
yield curve, which might indicate a recession.

2. Sectors in the Market the recent COVID-19 has put the country on lockdown for three (3)
months. The Bangko Sentral ng Pilipinas (BSP) implemented a series of rate cuts in 2020
from 4% at the start of the year to only 2.25% by June. Why did the BSP decide to decrease
policy rates?

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Explanation:

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This is done to promote economic growth by lowering finance costs, which might
increase borrowing and investment. However, keep in mind that extremely low rates can

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lead to excessive growth and inflation.
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