BONDS VALUATION ON CHANGING INTEREST RATE

7/30/2019 BONDS VALUATION ON CHANGING INTEREST RATE

1/18

MM5009

FINANCE

FINAL EXAM

BONDS VALUATION ON CHANGING INTEREST RATE

Henny Zahrany

29112551

Lecturer :

Anggoro Budi Nugroho

MASTER OF BUSINESS ADMINISTRATION

SCHOOL OF BUSINESS AND MANAGEMENT

INSTITUTE OF TECHNOLOGY BANDUNG

2013


2/18

Abstract

President Susilo Bambang Yudhoyono raised subsidized fuel prices on June 22, a move

the government forecasts will contribute to annual inflation of 7.2 percent, compared with 5.9

percent last month. Bank Indonesia lifted its benchmark rate to 6 percent on June 13, the first

increase since 2011, and Governor Agus Martowardojo said this week the central bank will

strengthen its policy mix to tackle consumer-price gains, as reported on Jakarta Globe on 5

July 2013. Surprisingly the inflation rate keeps going up along with the SBI rate.According to the

recent news from sindonews.com on 6 July 2013, the inflation rate on July will increase to

2,38%, as an impact of that the SBI rate is also increasing from 6% to 6,5% this month. In this

situation, the changing interest rate wouldaffect the Bonds prices. Reported on Jakarta Globe

that State-controlled airline Garuda Indonesia and property firm Bumi Serpong Damai led 11.7

trillion rupiah ($1.2 billion) of issuance, almost double the total in May, according to data

compiled by Bloomberg. These companies rushed their bonds issuance to avoid the interest

rate to going up. But what will actually happen to these recently issued bonds? On this paper we

would like to measure each of bonds value to finally decide wh ich bond investment should be

made. There are three bonds that would be valued, 1.G1AA01CN1 from PT.Garuda Indonesia

Tbk, 2.APLN01CN1 from PT.Agung Podomoro Land Tbk, and 3.BSDE01CN2 from PT.Bumi

Serpong Damai Tbk. The reason for these bonds to be valued is because of their issuance date

ranging from June-July 2013.


3/18

1. Problems

Seeing the inflation rate goes up for this month and also for this year, it is important for investors

to choose bonds that has minimum exposure to changing inflation rates/minimum sensitivity to

changes in inflation rate. We would like to measure each of the corporate bonds value to

compare the value of each bond, so that investors could decide which bond is better to beinvested.

To decide which bond to be invested, the bonds will be measure based on:

1. Value of the bond at time zero or the Bonds price 2. Bonds current yield3. Bonds Yield to Maturity (YTM)4. Comparation between the Bonds current yield and YTM5. Duration of Bonds or Macaulay Duration6. Value of the bond at changing required return due to expected required return7. Explanation of the relationship between changing required return and the value of the

bonds.

2. Methodology

A financial manager must understand the valuation process in order to judge the value of

benefits received from stocks, bonds, and other assets in view of their risk, return, and combined

impact on share value. While the value of a bond is the present value of the expected cash flows

on the bond,discounted at an interest rate that is appropriate to the riskiness of that bond.

According to Gitman, the basic bond valuation is given by this equation:

n

d

n

1tt

d

0

)k1(

1M

)k1(

1IV

where:

V0 = value of a bond that pays annual interest

I = interest

n = years to maturity

M = dollar par value


4/18

kd = required return on the bond

Another important thing concerning bond is bond yields. Yield or rate of return on a bond is

frequently used to assess a bonds performance over a given period of time. Current yield is the

annual interest payment divided by the current price, while yield to maturity (YTM) is the

compound annual rate of return that would be earned on the bond if it were purchased and held

to maturity. If the bond is traded, and a market price is therefore available for it, the internal rate

of return can be computed for the bond, i.e., the discount rate at which the present value of the

coupons and the face value is equal to the market price. This internal rate of return is called the

yield to maturity on the bond. YTM on a bond can be found by solving the Kd or require return

from the basic bond valuation formula. But on this paper it will be calculated using Microsoft

excel using the =RATE equation to make the process easier.

There are some impact that require return and time maturity have on bond value. Gitman said,

whenever the required return differs from the bonds coupon interest rate, the bonds value will

differ from its par value. Another important thing is the relationship between the required return

and the coupon interest rate. When the require return is greater than the coupon interest rathe the

bond value, B0,will be less than its par value, M.

The duration of a bond is a weighted maturity of all the cash flows on the bond including the

coupons, where the weights are based upon both the timing and the magnitude of the cash flows.

According to Aswath Damodaran, by incorporating the magnitude and timing of all the cash

flows on the bond, duration encompassed all the variables that affect bond price sensitivity in

onemeasure. The higher the duration of a bond, the more sensitive it is to changes in interest

rates.

To calculate the duration of a bond, in this paper we will be using Macaulay duration, with this

formula:


5/18

3. Data Analysis

3.1 PT.Garuda IndonesiaLast month PT.Garuda Indonesia decided to to raise Rp 2 trillion ($204 million) from

selling five-year bonds on this month as reported by Jakarta Globe on June 11, 2013

(http://www.thejakartaglobe.com/business/garuda-to-issue-rp-2-trillion-in-bonds/, 7/7/2013). The

issuance of these bonds were intended to buy new planes, such as B737-800NG, B777-300ER

jets from U.S. plane maker Boeing Co. (BA), and A330-300 and A320 planes from France-based

Airbus (http://www.euroinvestor.com/news/2013/06/11/garuda-to-offer-up-to-idr2-trillion-

bonds-june-july-proceeds-for-new-jets/12367671, 7/7/2013). It is confirmed from the

announcement made by PT.Bursa Efek Indonesia, that PT. Garuda Indonesia has listed its bonds

on PT. Bursa Efek Indonesia on 8 July 2013, with further information below:

Bonds name: Obligasi Berkelanjutan I Garuda Indonesia

Tahap I Tahun 2013

Bonds code: GIAA01CN1

ISIN code: IDA000059703

Value of the bond issuance: Rp2.000.000.000.000,-

Interest rate: Fixed, 9.25% per year

Time to maturity: 5 year

Date of issue: 5 July 2013

Maturity date: 5 July 2018

Interest payment: Every three months

First payment of interest rate: 5 October 2013

Source:www.idx.co.id
http://www.thejakartaglobe.com/business/garuda-to-issue-rp-2-trillion-in-bonds/http://www.thejakartaglobe.com/business/garuda-to-issue-rp-2-trillion-in-bonds/http://www.thejakartaglobe.com/business/garuda-to-issue-rp-2-trillion-in-bonds/http://www.idx.co.id/http://www.idx.co.id/http://www.idx.co.id/http://www.idx.co.id/http://www.thejakartaglobe.com/business/garuda-to-issue-rp-2-trillion-in-bonds/


6/18

On a further report from PT. Bursa Efek Indonesia on Beneficiary of Securities

Transaction report, List of Bond Transaction, on Tuesday, July 09, 2013 report, it was stated

that the GIAA01CN1 bond had a current price quote of 100.00.

Given the information above, now we would like to know:

1. Bonds valueThe bonds price was quoted at 100.00, so the Bonds value is 100% x

Rp2.000.000.000.000 = Rp2.000.000.000.000. Because the bonds price was quoted at

100.00, it means that the Bonds price equal the Par value (B0 = M), meaning that Bond

is selling at par.

The value above is when the Bond paid annually, but as you can see from the previous

information that the bond is paid quarterly. So to calculate the Bonds value with

quarterly interest, we use:

Bo = I x (PVIFAkd%,n) + M x (PVIFkd%,n)

B0 = (9,25% x Rp2.000.000.000.000)/4 x (PVIFA 2.3%, 20) + Rp2.000.000.000.000 x

(PVIF 2.3%, 20), by using Microsoft excel we could find that the bonds value is

Rp755.570.000.000.

2. Bonds current yieldTo get the bonds current yield as stated before, it was the annual interest payment

divided by the current price. Annual payment is: 9.25% x Rp.2.000.000.000.000 =

Rp.185.000.000.000, so the Bonds current yield is Rp.185.000.000.000 :

Rp.2.000.000.000.000 = 9.25%.

3. Bonds Yield To MaturityTo get the Yield to maturity, we can calculate it from the Bonds valuation formula.

n

d

n

t

td r

Mr

IV)1(

1

)1(

1

1

0

As the information from the announcement of the Bond said that it will be paid quarterly,

so the formula will change a little.


7/18

nd

n

t td r

Mr

IV

41

0

)4

1(

1

)4

1(

1

4

By using Microsoft excel, we can easily find the YTM or the required return. The

computation is shown below:

We can get the YTM by using equation =RATE on Microsoft excel. Number of period is

20 years since it was paid quarterly (5 multiplied by 4), along with the payment that is

divided by 4, so we get the payment for Rp.46.250.000.000 (coupon interest rate x Par

value / 4). So the YTM for quarter payment is 9,25% (2% multiplied by 4). As you can

see the YTM is the same as the coupon, which is true as the Bond is selling at par.

4. Yield to Maturity & Current YieldAs the bond trades at par, its yield to maturity will be equal to both the current yield and

the coupon rate.

5. Duration of Bond or Macaulay Duration

t cashflow PV t* PV

1 Rp46.250.000.000 Rp42.332.625.000 Rp42.332.625.000

2 Rp46.250.000.000 Rp38.748.250.000 Rp77.496.500.000

3 Rp46.250.000.000 Rp35.469.125.000 Rp35.469.125.000

4 Rp46.250.000.000 Rp32.467.500.000 Rp129.870.000.000

5 Rp46.250.000.000 Rp29.715.625.000 Rp29.715.625.000

6 Rp46.250.000.000 Rp27.199.625.000 Rp163.197.750.000

7 Rp46.250.000.000 Rp24.896.375.000 Rp24.896.375.000

8 Rp46.250.000.000 Rp22.792.000.000 Rp182.336.000.000


8/18

9 Rp46.250.000.000 Rp20.858.750.000 Rp20.858.750.000

10 Rp46.250.000.000 Rp19.092.000.000 Rp190.920.000.000

11 Rp46.250.000.000 Rp17.477.875.000 Rp17.477.875.000

12 Rp46.250.000.000 Rp15.997.875.000 Rp191.974.500.000

13 Rp46.250.000.000 Rp14.642.750.000 Rp14.642.750.000

14 Rp46.250.000.000 Rp13.403.250.000 Rp187.645.500.000

15 Rp46.250.000.000 Rp12.270.125.000 Rp12.270.125.000

16 Rp46.250.000.000 Rp11.229.500.000 Rp179.672.000.000

17 Rp46.250.000.000 Rp10.276.750.000 Rp10.276.750.000

18 Rp46.250.000.000 Rp9.407.250.000 Rp169.330.500.000

19 Rp46.250.000.000 Rp8.611.750.000 Rp8.611.750.000

20 Rp2.046.250.000.000 Rp348.681.000.000 Rp6.973.620.000.000

SUM Rp755.570.000.000 Rp8.662.614.500.000

Duration of the bond 11,46500589

From this excel calculation we can see the duration of the bond quarterly is 11,46 or 2,86

years (3/12 x 11,46).

6. Value of the bond at changing required return due to expected required returnAccording to the recent news from sindonews.com on 6 July 2013, the inflation rate on

July will increase to 2,38%. On the previous month, on June, the inflation rate is 1,03%

according to Badan Pusat Statistik and BI rate for 13 June 2013 is 6%. Based on this

information, We can calculate the new Bond value. From Bank Indonesias site, it is

stated that the SBI rate for 11-07-2013 is 6,5%.

First, from the previous information on the bond, the rd is 9,25%, so we could find the

risk premium of this bond by using this formula:

r = RF+RP

RP = r- RF

RP = 9,25% - 6%

RP = 3,25%


9/18

On 11-07-2013 the risk free rate or the SBI rate is increasing to 6,5%, so the required

return will be:

r = RF + RP

r = 6,5% + 3,25%

r = 9,75%

So now we can calculate the new bond value, using this formula:


B0 =( 9.75%/4) x Rp.2.000.000.000.000 x (PVIFA 9,75%/4, 20) +

Rp.2.000.000.000.000 x (PVIF 9,75%/4, 20)

Or by using the Microsoft excel, we get Rp711.693.969.818,56.

7. Explanation of the relationship between changing required return and the value of thebonds.

As the require return is increasing from 9,25% to 9,75% the Bond Value is decreasing to

Rp711.693.969.818,56. This value is the Bonds value for a bond with quarterly interest.

The previous Bonds value with quarterly interest, as shown on point number 1, is

Rp755.570.000.000. From this we can conclude that the Bonds value is decreasing as the

Bonds required return is falling and also when it is paid quarterly.

3.2PT.Agung Podomoro Land

This data below the Bonds information according to KSEI, Indonesian central securities

depository:

Security name

:OBL BKLJT I AGUNG PODOMORO LAND TAHAP I TAHUN

2013

Issuer : Agung Podomoro Land Tbk, PT

ISIN Code : IDA000058903

Short Code : APLN01CN1


10/18

Type : Straight Bonds

Listing Date : 28 Juni 2013

Stock Exchange : IDX

Status : Active

Nominal : 1,200,000,000,000.00

Current Amount : 0.00

Mature Date : 27 Juni 2018

Interest/Disc Rate : 9.25%

Interest Type : FIXED

Interest Frequency : 3 MONTHS

Currency : IDR

Form : Electronic

Effective Date ISIN : -

Day Count Basis :

Activity Sector : PROPERTY AND REAL ESTATE

Number of

Securities: (Total)

On a further report from PT. Bursa Efek Indonesia on Beneficiary of Securities Transaction

report, List of Bond Transaction, on Tuesday, July 09, 2013 report, it was stated that the

APLN01CN1 bond had a current price quote of 102.00.


1. Bonds value


11/18

The bonds price is quoted at 102.00, so it means that the Bonds price is: 102% x

Rp.1.200.000.000.000 = Rp.1.224.000.000.000. The Bond is selling at premium as the

Bonds price is higher than the par value.

This bond is also being paid quarterly, so the calculation on this bonds v alue with

quarterly interest is:


Bo = (Rp.1.200.000.000.000 x 8,75%)/4 x (PVIFA 2,2%, 20) + Rp.1.200.000.000.000

x )PVIF 2,2%, 20)

By using Microsoft excel we could get the Bonds value: Rp.482.074.932.028. The

Bonds value is become smaller because it was being paid quarterly.

2. Bonds current yieldTo get the bonds current yield as stated before, it was the annual interest payment

divided by the current price. Annual payment is 9,25% x Rp.1.200.000.000.000 =

Rp.111.000.000.000, so the current yield is: 9,1%.

3. Bonds Yield to Maturity

Using the same equation above, we get the YTM for quarterly interest is 8,75%.

4. Yield to Maturity and current yieldBecause the bond trades at a premium, its coupon rate will be greater than its current

yield, which will be more than its yield to maturity.


12/18

5. Macaulay Duration

t cashflow PV t* PV

1 Rp27.750.000.000,00 Rp25.516.125.000 Rp25.516.125.000

2 Rp27.750.000.000,00 Rp23.465.400.000 Rp46.930.800.000

3 Rp27.750.000.000,00 Rp21.575.625.000 Rp64.726.875.000

4 Rp27.750.000.000,00 Rp19.841.250.000 Rp79.365.000.000

5 Rp27.750.000.000,00 Rp18.242.850.000 Rp91.214.250.000

6 Rp27.750.000.000,00 Rp16.774.875.000 Rp100.649.250.000

7 Rp27.750.000.000,00 Rp15.426.225.000 Rp107.983.575.000

8 Rp27.750.000.000,00 Rp14.185.800.000 Rp113.486.400.000

9 Rp27.750.000.000,00 Rp13.042.500.000 Rp117.382.500.000

10 Rp27.750.000.000,00 Rp11.993.550.000 Rp119.935.500.000

11 Rp27.750.000.000,00 Rp11.027.850.000 Rp121.306.350.000

12 Rp27.750.000.000,00 Rp10.142.625.000 Rp121.711.500.000

13 Rp27.750.000.000,00 Rp9.326.775.000 Rp121.248.075.000

14 Rp27.750.000.000,00 Rp8.574.750.000 Rp120.046.500.000

15 Rp27.750.000.000,00 Rp7.886.550.000 Rp118.298.250.000

16 Rp27.750.000.000,00 Rp7.251.075.000 Rp116.017.200.000

17 Rp27.750.000.000,00 Rp6.668.325.000 Rp113.361.525.000

18 Rp27.750.000.000,00 Rp6.129.975.000 Rp110.339.550.000

19 Rp27.750.000.000,00 Rp5.638.800.000 Rp107.137.200.000

20 Rp1.227.750.000.000 Rp229.343.700.000 Rp4.586.874.000.000

Rp482.054.625.000 Rp6.503.530.425.000



years.




13/18






r = RF+RP

RP = r- RF

RP = 8,75%% - 6%

RP = 2,75%


return will be:

r = RF + RP

r = 6,5% + 2,75%

r = 9,25%


Bo

= I x (PVIFAkd%,n

) + M x (PVIFkd%,n

)

B0 = (9,25% x Rp.1.200.000.000.000)/4 x (PVIFA 9,25%/4,20) + Rp.1.200.000.000.000

x (PVIF 9,25%/4, 20). By using Microsoft excel to calculate it, we get

Rp.453.395.845.161.


The new required return is equal to the coupon interest rate, causing the bond will trade at

par. The increasing required return decrease the Bonds value to Rp.453.395.845.161.


14/18

3.3PT. Bumi Serpong Damai Tbk

On a further report from PT. Bursa Efek Indonesia on Beneficiary of Securities Transaction

report, List of Bond Transaction, on Tuesday, July 09, 2013 report, it was stated that the

BSDE01CN2 bond had a current price quote of 99.80.


1. Bonds valueSince the bonds price is quoted at 99,8, so the bonds price is 99,8% x

Rp.1.750.000.000.000= Rp.1.746.500.000.000. This bond is also paid quarterly, so the

Bonds value is:


B0 = (8,375% x Rp.1.750.000.000.000)/4 x (PVIFA 8,42%/4, 20) +

Rp.1.750.000.000.000 , by using Microsoft excel we get the Bonds value paid quarterly=

Rp.696.188.105.825. Since the bonds value is below the par value or since the YTM is

higher than the coupon interest rate, this bond trades at discount.

2. Bonds current yieldTo get the bonds current yield as stated before, it was t he annual interest payment

divided by the current price. Annual payment is 8,375% x Rp.1.750.000.000.000=

Rp.146.562.500.000.000, so the current yield is: 8,39%.


15/18

3. Bonds Yield to Maturity

4. Yield to maturity and current yield.The Yield to maturity (8,42%) is greater than the current yield (8,39%) and much greater

than the coupon interest rate, so the bond is selling below par or at discount.

5. Macaulay durationt cashflow PV t* PV

1 Rp36.640.625.000,00 Rp33.793.648.438 Rp33.793.648.438

2 Rp36.640.625.000,00 Rp31.170.179.688 Rp62.340.359.375

3 Rp36.640.625.000,00 Rp28.748.234.375 Rp86.244.703.125

4 Rp36.640.625.000,00 Rp26.516.820.313 Rp106.067.281.250

5 Rp36.640.625.000,00 Rp24.457.617.188 Rp122.288.085.938

6 Rp36.640.625.000,00 Rp22.559.632.813 Rp135.357.796.875

7 Rp36.640.625.000,00 Rp20.808.210.938 Rp145.657.476.563

8 Rp36.640.625.000,00 Rp19.192.359.375 Rp153.538.875.000

9 Rp36.640.625.000,00 Rp17.701.085.938 Rp159.309.773.438

10 Rp36.640.625.000,00 Rp16.327.062.500 Rp163.270.625.000

11 Rp36.640.625.000,00 Rp15.059.296.875 Rp165.652.265.625

12 Rp36.640.625.000,00 Rp13.886.796.875 Rp166.641.562.500

13 Rp36.640.625.000,00 Rp12.809.562.500 Rp166.524.312.500

14 Rp36.640.625.000,00 Rp11.816.601.563 Rp165.432.421.875

15 Rp36.640.625.000,00 Rp10.896.921.875 Rp163.453.828.125

16 Rp36.640.625.000,00 Rp10.050.523.438 Rp160.808.375.000

17 Rp36.640.625.000,00 Rp9.270.078.125 Rp157.591.328.125

18 Rp36.640.625.000,00 Rp8.551.921.875 Rp153.934.593.750

19 Rp36.640.625.000,00 Rp7.885.062.500 Rp149.816.187.500

20 Rp1.786.640.625.000 Rp354.648.164.063 Rp7.092.963.281.250

Rp696.149.781.250 Rp9.710.686.781.250


16/18



years.








r = RF+RP

RP = r- RF

RP = 8,42%% - 6%

RP = 2,42%


return will be:r = RF + RP

r = 6,5% + 2,42%

r = 8,92%



B0 = (8,375% x Rp.1.750.000.000.000)/4 x (PVIFA 8,92%/4, 20) +

Rp.1.750.000.000.000 x (PVIF 8,92%/4,20), with using Microsoft excel, we could find

the new Bond value at increasing required return is Rp.653.264.306.277.



17/18

Because of the changing required return to 8,92%, the bonds value is decreasing to

Rp.653.264.306.277. This new required return cause the bond to be selling at discount, as

the required return is higher than the coupon interest rate.

4.Conclusion & Recommendation

From the above explanation about the measurement of the Bonds value, we can conclude

the findings into this table:

Bonds code G1AA01CN1 APLN01CN1 BSDE01CN2

Company name PT.Garuda

Indonesia

PT.Agung Podomoro

Land

PT.Bumi Serpong

Damai

Bonds value at YTM Rp.755.570.000.000 Rp.482.074.932.028 Rp.696.188.105.825

Bonds value at

increasing rate

Rp.711.693.969.818 Rp.453.395.845.161 Rp.653.264.306.277

Macaulay Duration of

bond

2,86 years 3,37 years 3,48 years

Credit rating A A AA-

Bond sells at Par Premium Discount

From three of the bonds, Bond APLN01CN1 is the only bond that is selling at premium. Afterthe increasing required return, the Bond would be selling at par, this show a profitable

investment to be made. APLN01CN1 is also having a higher coupon rates with BSDE01CN2

bond, which will decrease its sensitivity of the interest rate change. Bond G1AA01CN1 is better

than the BDSE01CN2, but bond APLN01CN1 provides a more beneficial investment as it is

selling at premium. Now if we take a look at the credit rating of each bond that indicates the

likely payment of bond interest and principal, they are categorized as a safe bonds because the

risk of being default is low, so from here the credit rating of the bond is not a problem. Based on

the Macaulay duration of bond, BSDE01CN2 provides the highest of duration, which is 3,48

years. This indicates a more sensitive bond to the changes in interest rate. G1AA01CN1 also

gives a low duration of bonds, it means that it is less sensitive than the other two bonds to the

change in interest change. So out of the three bonds, bond APLN01CN1 and GIAA01CN1 give a

better value of the bond, but bond APLN01CN1 is more profitable because it trades at premium.


18/18

References

Damodaran,A.,2002,Investment Valuation:Tools and Techniques for Determining the Value of

Any Asset, Second Edition,Canada: John Wiley & Sons, Inc.

Gitman, J., 2009,Principle of Managerial Finance, s.1. : Prearson Prentice Hall.

:http://www.thejakartaglobe.com/business/garuda-leads-indonesia-debt-rush-before-rates-rise-asean-credit/

www.idx.co.id

http://ekbis.sindonews.com/read/2013/07/06/33/758063/inflasi-pada-juli-diperkirakan-2-38
http://www.thejakartaglobe.com/business/garuda-leads-indonesia-debt-rush-before-rates-rise-asean-credit/http://www.thejakartaglobe.com/business/garuda-leads-indonesia-debt-rush-before-rates-rise-asean-credit/http://www.thejakartaglobe.com/business/garuda-leads-indonesia-debt-rush-before-rates-rise-asean-credit/http://www.thejakartaglobe.com/business/garuda-leads-indonesia-debt-rush-before-rates-rise-asean-credit/http://www.idx.co.id/http://www.idx.co.id/http://www.idx.co.id/http://www.thejakartaglobe.com/business/garuda-leads-indonesia-debt-rush-before-rates-rise-asean-credit/http://www.thejakartaglobe.com/business/garuda-leads-indonesia-debt-rush-before-rates-rise-asean-credit/

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BONDS VALUATION ON CHANGING INTEREST RATE