Philippine Bond Market

Prepared by: VM Galleto

 Bonds: Definition and Key Characteristics
 are securities that represent a debt owed by the issuer to the investor
 are long-term debt securities that are issued by government agencies or corporations
 issuer of a bond is obligated to pay interest payments periodically such as annually or semi-
annually and the par value at maturity

1. Face Value (Par Value)- is the price at which the bond is sold to investors when first issued and also the price
at which the bond is redeemed at maturity
2. Coupon Rate- periodic interest payments expressed as a fixed percentage of the bond’s face value
3. Coupon- the periodic interest payment promised to bondholders which is equal to the coupon rate times the face
value of the bond

4. Maturity- the length of time until the principal is scheduled to be repaid

5. Call Provisions- a provision that enables the issuer to buy the bond back from the bondholder at a pre-specified
price prior to maturity

6. Put Provisions- a provision that enables the buyer to sell the bond back to the issuer at a pre-specified price prior
to maturity

7. Sinking Fund Provisions- a provision that requires the issuer to repurchase a fixed percentage of the outstanding
bonds each year, regardless of the level of interest rates
Types of Bonds
 By Issuer Category

1. Issued by the National Government through the Bureau of the Treasury (BTr)
a) Treasury bonds- also known as Fixed-rate Treasury Notes (FXTNs) have maturities greater
than a year; normally issued in 2-, 3-, 4-, 5-, 7-, 10-, 20- and 25-year tenors; pay coupon or
interest on a semi-annual basis; from time to time, the government also issues zero coupon
bonds
b) Retail treasury bonds- part of the government’s savings mobilization program designed to
make government securities available to retail investors and, at the same time, create
savings consciousness among Filipinos; minimum issue is P5,000
c) Multi-currency retail treasury bonds- offered to overseas Filipino workers (OFWs) and
migrant Filipinos, and their families to provide a safe haven for their hard-earned foreign
currency savings
d) Dollar-linked peso notes – term is usually 2-3 years; coupon is paid semi-annually; notes
track the movement of the Philippine Peso and US Dollar exchange rate; payments of
interest and principal are linked to the movement of the exchange rate and computed
based on the foreign exchange factor
Types of Bonds
 By Issuer Category

2. Issued by the National Government through Other Entities- GOCCs and govt. agencies
A. Agency bonds- to raise funds that are used for purposes that Congress has deemed to be in the national
interest

Example: Bonds issued by HDMF to fund housing programs

B. Municipal bonds (munis)- issued by states, cities, counties and other government entities
 Puerto Princesa Green Bonds  used to finance the rehabilitation of Puerto Princesa
 Boracay-Aklan Provincial Bonds  to finance Boracay-Aklan Jetty Port
 Tagaytay City Tourism Bonds  to finance first full-service convention center complex with an assembly hall
that can accommodate 800 delegates
 Caloocan City “Katipunan” Bonds  to finance the construction and redevelopment of the Caloocan City
Hospital, the public market and the decongestion and commercial development of the City Hall area
 Iloilo City Bonds  to fund the construction and development of 410 housing units for city hall employees,
public school teachers and local police officers

 General Obligation Bond- if backed by the full taxing power of the municipality
 Revenue Bond- if interest and principal payments are dependent on the income of the project financed by the
bond issuance
Types of Bonds
 By Issuer Category

3. Issued by Private Entities  Corporate Bonds

A. Secured Bonds- the issuer is backing it with collateral
i. Senior Secured Bonds- holders will always be first to receive a payout from a company’s holdings in the event of
default
ii. Mortgage Bonds- secured with real estate property
iii. Collateral Trust Bonds- secured by a financial asset—such as stock or other bonds—that is deposited and held by
a trustee for the holders of the bond
iv. Equipment Trust Certificate- secured by tangible non-real-estate property, such as heavy equipment or
airplanes
B. Unsecured Bonds/Debentures- backed only by the general creditworthiness of the issuer
v. Senior Unsecured Bonds- bondholders enjoy a privileged position in the event of default with respect to the
payout order
vi. Junior Subordinated Bonds – unsecured corporate bonds where bondholders are the last of all bondholders to
have a claim on the issuing company’s assets if it goes out of business
vii. Investment Grade Bonds- have higher credit rating thus implying less credit risk than high-yield corporate bonds
viii. High-Yield/ Junk Bonds- have lower credit rating thus implying higher credit risk than investment-grade bonds
and, therefore, offer higher interest rates in return for the increased risk
ix. Convertible Bonds- can be converted into a fixed number of ordinary shares in the same company at a set price
Types of Bonds

 By Currency of Instrument
1. Philippine Peso
2. United States (US) Dollar
3. Euro

 By Offering Type
1. Public Offering- sold to both non-qualified and qualified investors
2. Private Placement- sold to a limited number of investors (currently set at 19)
and typically to qualified investors only
Methods of Issuing Bonds
1. Bonds Issued by Government through Bureau of Treasury
A. Regular Issuance
I. Auction- mode of sale or offering government securities participated by accredited
Government Securities Eligible Dealers (GSEDs); bids are submitted electronically
through the auction front-end system Automated Debt Auction Processing System
(ADAPS) and evaluated for acceptance or rejection by the Auction Committee

II. Tap method- used only whenever there is an acute shortage of securities in the
market; bonds are issued over a period of time rather than in one auction sale; bonds
are sold at market value but under the same terms- face value, coupon rate and
maturity date
III. OTC method- represents the sale of government securities to tax-exempt institutions,
GOCCs, and local government units (LGUs)
B. Special Issuance- targeted for retail investors
Methods of Issuing Bonds

2. Bonds Issued by GOCCs

> bonds are typically priced and allocated through auction to participating dealers; terms and
conditions of the issuance are prescribed in an offering document or prospectus issued by the GOCC
or government agency

3. Bonds Issued by Private Entities

I. Public Offer- intended for sale to both the retail and qualified investor markets
II. Private Placement- intended to be sold to a limited number of investors, typically
qualified investors
 Participants in the Bond Market
1. Issuers
2. Investors
A. Qualified Investors- persons with high net worth or with financial background that allows him or her to bear the risk
that may arise from participating in an OTC market
i. Banks
ii. Registered investment houses
iii. Insurance companies
iv. Pension funds or retirement plans maintained by the Government of the Philippines or any of its political subdivisions, or those
managed by a bank or other persons authorized by the BSP to engage in trust functions
v. Investment companies
vi. Other persons the SEC may determine by rule as qualified buyers on the basis of financial sophistication, net worth, knowledge
and experience in financial and business matters, or amount of assets under management
vii. A natural person who has a minimum annual gross income of PHP25 million at least 2 years prior to registration, or a total
portfolio in securities of at least PHP10 million registered with the SEC, or a personal net worth of at least PHP30 million; and
has been engaged in securities trading in his personal capacity, or through a fund manager, for a period of 1 year, or held for at
least 2 years a position of responsibility in any professional or business entity that requires knowledge or expertise in securities
trading.

B. Non- Qualified Investors- public or retail investors

3. Underwriters- a person who guarantees on a firm commitment and/or declared best-effort basis the distribution and sale of
securities of any kind by another company (UBs & Investment Houses)

4. Securities Registries or Transfer Agents- a BSP-accredited bank or non-bank financial institution designated or
appointed by the issuer to maintain the securities registry book, either in electronic or printed form
Credit Rating of Bonds
 As a general rule under Republic Act (RA) No. 8799, or the Securities Regulation Code (SRC) Rule 12.1-6, a
credit rating from an SEC-accredited CRA is required to issue corporate bonds and CPs, except: 1) when
the issuance amounts to not more than 25% of the issuer’s net worth; or 2) where there is an irrevocable
committed credit line with a bank covering 100% of the proposed issuance.
 Credit rating requirements do not apply to government and government-guaranteed debt securities.

Domestic Credit Rating Agencies:

1. Philippine Rating Service Corporation- is the only domestic credit rating agency (CRA) in the Philippines
accredited by both the BSP and the SEC. The rating agency is also an affiliate of Standard and Poor’s.
2. Credit Rating and Investors Services Philippines (CRISP)- was launched and received its accreditation as
a CRA from the SEC in 2008

International Credit Rating Agencies (Big Three):

3. S & P Global Ratings (previously Standard & Poor’s)
4. Moody's Investors Service (Moody’s)
5. Fitch Ratings Inc.
 Philippine Market Regulatory Structure
1. BSP- supervises banks and non-bank financial institutions that perform quasi-banking functions

2. SEC- regulates both primary and secondary debt markets, and oversees the Philippine Stock Exchange, the
three subsidiaries of the Philippine Dealing Systems Holdings Corporation (PDS Group), brokers, registrars,
transfer agents, and clearinghouses

3. Department of Finance- regulates the issuance of government securities in the market

4. Philippine Dealing System (PDS) Group of Companies

A. Philippine Dealing and Exchange Corporation (PDEx)- operates the electronic trading platforms for
securities, providing price discovery and transparency services, self-regulatory functions, and is linked to
the settlement systems

B. Philippine Depository and Trust Corporation (PDTC)- provides central securities depository services
for both the equities and fixed income markets, and registry services for the fixed income market

C. Philippine Securities Settlement Corporation (PSSC)- provides electronic settlement facilities with
straight-through process (STP) and delivery-versus-payment (DVP) capabilities
 Trading of Bonds
1. Bureau of Treasury- for primary market

2. Philippine Dealing and Exchange (PDEx)- for secondary market; provides a centralized
infrastructure for trading, clearing and settlement of fixed-income securities, which ensures price
discovery, transparency and investor protection
 Trading of Bonds
1. Bureau of Treasury- for primary market

2. Philippine Dealing and Exchange (PDEx)- for secondary market; provides a centralized
infrastructure for trading, clearing and settlement of fixed-income securities, which ensures price
discovery, transparency and investor protection
Factors that Affect Bond Investment
 Interest Rates
 when interest rates rise, bond prices fall
 when interest rates fall, bond prices rise
 Inflation
 when inflation is on the rise, bond prices fall
 when inflation is decreasing, bond prices rise
 Credit Ratings
 if the issuer’s credit rating goes up, the price of its bonds will rise
 if the rating goes down, it will drive their bond prices lower
Bond Price: Coupon Bonds

Bond Price = present value of its expected future cash flows

Yield to Maturity (YTM) = rate of interest used to discount the bond’s cash flows

where:
C = the periodic coupon payment
y = the yield to maturity (YTM)
F = the bond’s par or face value
t = time
T = the number of periods until the bond’s maturity date
Bond Price: Coupon Bonds

Example:
Suppose a bond has a face value of $1,000, a coupon rate of 4% and a maturity of
four years.  The bond makes annual coupon payments.  If the yield to maturity is
4%, the bond’s price is determined as follows:

If the yield to maturity is 5%, the price is:

Bond Price: Semi Annual Coupon Bonds
Bond Price: Zero Coupon Bond
Nominal vs. Real Interest Rates
Nominal Interest Rate = stated interest rate
Real Interest Rate = Nominal Interest Rate- Inflation Rate
= real cost of borrowing
Nominal Yield vs. Current Yield

Nominal yield, or the coupon rate, is the stated interest rate of the bond.

Current yield or current return represents the return an investor would expect to
earn, if the owner purchased the bond and held it for a year.
Nominal Yield Sample Computation

What is the nominal yield for a bond that has a par value of $1,000 and pays a
coupon of $100?

Solution:

Nominal Yield = $100

$1000
= 10%
Current Yield Sample Computation

What is the current yield for a bond that has a par value of $1,000 and a coupon
interest of 10%? The current market price for the bond is $921.01.

Solution:

Current Yield = ($1,000 x 0.10)

$921.01
= 10.86%
Current Yield Sample Computation

What is the current yield for a bond that has a par value of $1,000 and a coupon
interest of 10%? The current market price for the bond is $1,000.

Solution:

Current Yield = ($1,000 x 0.10)

$1,000
= 10%
Yield to Maturity (YTM) or Internal Rate of Return (IRR)
 YTM is the yield an investor receives for holding a bond until it matures.

Sample Computation: Bond Sold at a Premium

$1,000-face value coupon bond with a coupon rate of 10% that is bought for $1,000, held for
one year, and then sold for $1,200.

Solution:

YTM = $100 + ($1200 - $1000)

$1000
= 30%
Yield to Maturity (YTM) or Internal Rate of Return (IRR)
 YTM is the yield an investor receives for holding a bond until it matures.

Sample Computation: Bond Sold at a Discount

$1,000-face value coupon bond with a coupon rate of 10% that is bought for $1,000, held for
one year, and then sold for $800.

Solution:

YTM = $100 + ($800 - $1000)

$1000
= -10%
YTM Formula Components

Rate of Capital Gain

Current Yield
Yield to Maturity (YTM) or Internal Rate of Return (IRR)
Sample Computation: Interest Rate Increases
A 10-year zero-coupon bond for which the interest rate has increased from 10% to 20%. The
bond has a face value of $1,000. Calculate the capital gain/loss.
Gain/Loss = Pt + 1 – Pt
Pt
= $193.81- $385.54
$385.54
= -49.73%

where Pt + 1 = price of the bond 1 year from now

Pt = price of the bond today

Bond Duration
 Bond duration is a way of measuring how much bond prices are likely to change if and when
interest rates move. In more technical terms, bond duration is measurement of 
interest rate risk.

 Duration measures how long it takes, in years, for an investor to be repaid the bond’s price by
the bond’s total cash flows.
Bond Duration Sample Computation
Key Takeaways
 If the market price for the bond is equal to its par value, current yield is equal to nominal yield.
 The return on a bond will not necessarily equal the interest rate on that bond.
 When a bond is bought at a discount, yield to maturity will always be greater than the nominal
yield.
 When a bond is bought at a premium, the yield to maturity will always be less than the nominal
yield.
 The price of a coupon bond and the yield to maturity are negatively related; that is, as the yield to
maturity rises, the price of the bond falls. If the yield to maturity falls, the price of the bond rises.
 Current bond prices and interest rates are negatively related: when the interest rate rises, the price
of the bond falls and vice versa. A rise in interest rates therefore means that a capital loss has
occurred. When the real interest rate is low, there are greater incentives to borrow and fewer
incentives to lend.
 Prices and returns for long-term bonds are more volatile than those for shorter-term bonds. Changes
in interest rates therefore make investments in long-term bonds quite risky.
 Bonds whose term to maturity is longer than the holding period are subject to interest-rate risk:
Changes in interest rates lead to capital gains and losses that produce substantial differences
between the return and the yield to maturity known at the time the bond is purchased.
 All else being equal, the longer the term to maturity of a bond, the longer its duration.
 All else being equal, when interest rates rise, the duration of a coupon bond falls.
 All else being equal, the higher the coupon rate on the bond, the shorter the bond’s duration.