BondInvestmentProject

Fixed Income Investment Analysis

FIN 123 (Y)
Submitted to: Roger Sy Siong Kiao, PhD.
February 27, 2015

Banson, Ysabel Louise

Limcaoco, Ramon
Mendoza, Camille Angelica
Tan, Cole Mavrick
Torres, Nicole Patricia

I. HypotheticalSituation

Kelvin just graduated from college. He is currently 20 years old. Kelvin wantsto start

up his own businessby the timethat he is 30. As a graduation gift, Kelvin wasgivenPhp10

Million by his grandmother. He wants to grow his money, so he is planning to invest it in

bonds. Kelvin has a moderately aggressive risk tolerance. Kelvin doesnotknowwhattypeof

bonds to invest his money in to be able to meet his stated objectives and to be able to

maximizeprofitsgivenhisrisktolerance.

II.InvestmentGoals

Based on the situation, Since Kelvin is aiming for high interest profits and not just

merely retaining his capital, he is looking to take on a relatively higher risk in exchange for

higher income. That said, the goal is to invest mostly in corporate bonds (with a higher

interest payment), instead of government securities that are relatively safer,buthavealower

interest payment. To offset the risk, the group is diversifying the bonds in different industries

and structuring the bond based on the bond ladder. The group also aims
for bonds whose

prices will improve as the economy does. If the economy is improving, the probability of

defaultlessens.

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III.BondStructure

The group decided to structurethe bond basedonabondladder.Php4Million willbe

invested in Ayala Corporations 5Year Fixed Income Investment BondandPhp 6 Millionwill

be investedin Energy Development Corporations 10 year bond. Abondladderstaggersthe

maturity of fixedincome investments, while creating a schedule for reinvesting the proceeds

as each bond matures. Sinceholdingsarenotbunchedupinonetimeperiod,itreducesthe

risk of being caughtholdingasignificantcashpositionwhenreinvestingislessoptimal.When

rates rise, longterm bond funds get hurt worse than shortterm ones. This structure offsets

thatrisk.

The group will invest incorporatebondsscheduled tomaturein5years(Ayala) and8

years (EDC). As each bond maturesandrepaystheprincipal,theproceedswillbereinvested

in a longer maturity bond. Longerterm bonds typically offer higher interest rates. More

importantly, because no two bonds mature at the same time, maturity distribution is

diversified.Laddersisappropriateforthegroupslongtermobjectives.

Theadvantagesofthisstrategyaretheff:

Theperiodicreturnofprincipalprovidesadditionalinvestingflexibility.

The proceeds received from principal and interest payments can be invested in

additional bonds if interest rates are relatively high or in other securities if they are

relativelylow.

Exposure to interest rate volatilityisreducedbecausethebondportfolioisnowspread

acrossdifferentcouponsandmaturities.

As for the industry, the group decided to invest in 2 different industries that are

currently posing high growths: the Real Estate and the Energy industry. These industrieswill

bediscussedinthenextsection.

IV.ChosenBondandIndustry

A. AyalaCorporation

BriefCompanyInformation

Ayala Land is therealestate arm of Ayala Corporation. Ayala Land was launched by

Ayala Corporationin1988toenhancemanagementfocusonAyalaCorporationsexistingreal

estate business and tohighlight the value ofassets,managementandcapitalstructure ofthe

real estate business. Ayala Land is engaged principally in the planning, development,

subdivision andmarketingoflargescalecommunitieshavingamixof residential,commercial,

leisureandotheruses.

ChosenIndustry

The commercial real estate industry inthe Philippines has achievedcontinuedgrowth

largely due to the business process outsourcing which is rapidly expanding in the services

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sector. The success of the services sector significantly influences the overall strengthof the

officerealestatesegmentandretailsegment.1

ALI has set plans to build largescale shopping centers over the nextfive years. The

company also sees thepotentialinputtingupmallsinkeycitiesoutsideMetroManilasuchas

CagayandeOro,Davao,Bacolod,Iloiloandthelike. 2

GrowthintheIndustry3

OfficeRealEstate

The growth of the BPO sector are fillingup office spaces the most. In additiontothis,

the ASEAN integration willresult to operations in SingaporeandHongKongbranchingout to

thePhilippines,andthuswecanexpectariseinthedemandforofficespacesinthecountry.

CommercialRealEstate

Big players in thecommercial real estate industry has beenexpandingandupgrading

their malls. In addition to this, other companies such as Puregold and Vistaland plans to

invest in theretailbusinessbecausetheypredict that theincreasingmiddleclasswillincrease

consumerspending.

ResidentialRealEstate

RealEstateCompanieshasbeenexpandingoperationsinkeycitiesoutsideMetro

Manila.BigplayershasbeeninvestinginconstructionofCondominiumsandtownhousesin

Cebu,Davao,Bacolodandthelike.

AbouttheBond4

1

(
www.marketresearch.com )lastopenedfebruary25,2015
2
http://www.ap.jll.com/asiapacific/engb/Research/propertymarketmonitorphilippinesmanila201502.pdf?f9a8b618
dd9a4369b43e497662e85d13
3
http://www.bpihousingloans.com/pages?page=Whatcanweexpectfromtherealestateindustryin2015
4
http://www.pds.com.ph/wpcontent/uploads/2014/01/ALIBondsDue2020and2033ProspectusFINAL.pdf
4
 Ayala Land, Inc. (ALI) isofferingfixed rate bonds with an aggregate principal amount

of P6,000,000,000.00. The Bonds are issued simultaneously in two (2) series on the Issue

Date: (a) the SevenYear Bonds with an aggregate principal amount of P4,000,000,000.00

shall have a term ending seven (7) yearsfromtheIssue Date,oronOctober10,2020,witha

fixed interest rate of 4.6250% per annum and (b) the TwentyYear Bonds withanaggregate

principal amount of P2,000,000,000.00 shall have a term ending twenty (20) years from the

IssueDate,oronOctober10,2033,withafixedinterestrateof6.0000%perannum.

TheteamdecidedtoinvestPhp4,000,000inthesevenyearbondsmaturingonOctober10,

2020.Informationarethefollowing:

SeriesCode:ALI20R19
CreditRating:AAA
CouponRate:4.63%perannum
Issueon:October10,2013
Matureson:October10,2020
Years:
5.62
MarketPrice:
103.3542
MarketRate:3.88%
Interest:AnnuallyonOctober10
Trustee:BankofthePhilippineIslandsAssetManagementandTrustGroup
Investment:4Million
TheBondswillberedeemedatparor100%offacevalueontheMaturitydate.

TradingandSettlementOperatingGuidelines(PhilippineDealingSystemHoldingCorp)

Series Code is ALI 20 R 19. ALIis theIssuerSymbol.20representsthematurityyear

whichis2020.R19representstheFirstCallOptionYearwhichis2019.

Quotations for ALI20 R19bondsareexpressed intermsofCleanPriceatadaycount

standardof30E/360ISMAnonendofmonth.

With regards to tax, the settlement value of a done trade on ALI 20 R19 shall be

computed ona taxwithheld basis, based on a withholding taxrateof20%.Bondholdersmay

transfertheirBondsanytimeregardlessoftaxstatusofthetransferorandtransferee.

B.EnergyDevelopmentCorporation

EnergyDevelopmentCorporation(EDC)RetailBondlistedonPDEx

BriefCompanyInformation

TheEnergyDevelopmentCorporationisthefirstcorporationtappingintothe

geothermalenergyindustry.Thecompanydevelopsandmanagesrenewableenergyfrom

sourcesaroundthePhilippines.SomeexamplesofprojectsEDChasgottenintoarethe

productionofwaterbasedsteampowerforenergygeneration,theconstructionofsteam

fieldsthroughtheuseofevolutionarytechnology,hydropowerprojects,andwindpowered

projectsaswell.ItisEDC'sgoaltoremainasamarketleaderthroughfurtherdevelopmentof

ecofriendlypowergenerationresourcesbymeetingthegrowingdemandforenergywithas

lowcarbonpoweroptionsaspossiblesuchaslowC02emissionsperprojectoutlet.

ChosenIndustry

Theenergyindustryortobemorespecific,thegeothermalenergyindustryisa

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boomingindustrybecausemajorityofthecountry'spopulationrelyonveryfewcompanieslike

thistosustaintheirdaytodaylivesregardingtheirneedforelectricity.Assuch,therewill

alwaysbeademandresultinginusuallylowrisks.Toaddtothis,EDCcontinuestoshow

promisewiththeirexperiencedmanagementteam,leadershipintheindustry,upgrading

profitability,reducedexposuretoforeigncurrencyrisk,adequateliquidity,andstrongcash

flowgenerationwhichultimatelygavethemtheirhighinvestmentgrade.

OpportunitiesintheEnergyIndustry

The Philippine power sectors offer great many opportunities for the private sector (both

domestic and international) in years to come. In the generation sector capacity addition of

over 13GW, coupled with setting up of high capacity interconnectors between different parts

of this huge archipelago, would mean largeopportunitiesforinvestmentbytheprivatesector.

KPMI estimates an aggregate investment opportunity of about US$25 billion until 2030. The

opportunity isclearlybigandthesectorhastheplayers whocouldpotentiallyhandlethat level

ofinvestmentrequirements.

In conclusion, we believe that the Philippine power sector is undergoing a huge

transformationthatoffersopportunitiesbutalsohighrisksthatneedtobemanaged.

PhilippineGeothermalAreas

V.Bo
ndValuation

The group aims to measure the interest rate risk of the bonds chosen using the
durationmethod,andassessthereinvestmentriskusingYieldToMaturitymeasures.

a. AyalaFixedRateBonds

i.)Duration

Analysts predict interest rates to be stable for the next2 years,sothegroupassumes

only a slight change in bp for Ayalas 5 year bond. Tablebelowshowsthepricechangefora
25basispointshockinmarketinterestrates.

Year0 Year1 Year2 Year3 Year4 Year5

Yield 3.63% 3.88% 4.13% 4.38% 4.63% 5.160%

Price 105.31 103.35 101.80 100.68 100 99.46

Ayalasbondscouponrateis4.63%andissellingfor103.35.Thecurrentmarket
interestrateis3.883%.

Computingforthebondsduration:

Thebondspricesensitivityfora25basispointshockis
6.79
.

Ontheotherhand,incaseofa50basispointchangeinmarketprices,theapproximateprice
changesareseeninthetablebelow:

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 Year0 Year1 Year2 Year3 Year4 Year5

Yield 3.38% 3.88% 4.38% 4.88% 5.38% 5.88%

Price 106.69 103.35 100.89 99.31 98.61 97.89

Computingforthebondsduration:

Thebondspricesensitivityfora50basispointshockis
5.61
.

ApproximatePriceChangesGivenDuration

+/50bp +/100bp +/120bp +/150bp

PriceChange 2.805% 5.61% 6.732% 8.415%

Price 100.45/106.25 97.55/109.14 96.39/110.31 94.65/112.05

ii.)ReinvestmentRisk

ThereinvestmentriskiscomputedusingtheYieldtoMaturitymeasureshowninthe
tablebelow:

ValuesinPhP

CouponInterest 926,000

CapitalGain/(Loss) (134,000)

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 ReinvestmentIncome 74,692.81

TotalDollarReturns 866,692

TotalFutureDollars 5,000,692.81

DollarReturnswithoutReinvestment 792,000

Only a small portion of the Total Dollar Returns are from the reinvestment income.
Only 8.61% are from reinvestment income, therefore implying a small reinvestment risk for
Ayala Corporations 5year Fixed Income Bond. Even without reinvestment, itwouldstillearn
Php792,00019.8%ofitsoriginalinvestmentofPhp4Million.

b.Longtermbond
i.)Duration

Year0 Year1 Year2 Year3 Year4 Year5

Yield 3.9 4.15 4.4 4.65 4.9 5.15

Price 106.21 103.89 101.96 100.42 99.27 98.52

EDCscouponrateis4.7312.CurrentMarketInterestRateis4.15%

Computingforthebondsduration:

y = 0.0025
V 0 = 103.89
V = 106.21
V += 101.96

(106.21101.96)
Duration = 2(103.89)(0.0025) = 8.18

Thebondspricesensitivityfora50basispointshockis
8.18
.

Ontheotherhand,incaseofa50basispointchangeinmarketprices,theapproximateprice
changesareseeninthetablebelow:

Year0 Year1 Year2 Year3 Year4 Year5

Yield 3.65 4.15 4.65 5.15 5.65 6.15

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 Price 108.17 103.89 100.48 97.89 96.09 95.1

EDCscouponrateis4.7312.CurrentMarketInterestRateis4.15%

Computingforthebondsduration:

y = 0.005
V 0 = 103.89
V = 108.17
V += 100.48

(108.17100.48)
Duration = 2(103.89)(0.005) = 7.4

Thebondspricesensitivityfora50basispointshockis
7.4
.

ApproximatePriceChangesGivenDuration

+/50bp +/100bp +/120bp +/150bp

PriceChange 3.7% 7.4% 8.88% 11.1%

Price 103.50/107.73 96.20/111.58 94.75/113.03 92.36/115.42

ii.)ReinvestmentRisk

ThereinvestmentriskiscomputedusingtheYieldtoMaturitymeasureshowninthe
tablebelow:

ValuesinPhP

CouponInterest 2,270,976

CapitalGain/(Loss) (233,400)

ReinvestmentIncome 358,793.4

Principal 6,000,000

TotalDollarReturn 2,396,369.4

TotalFutureDollars 8,629,769.4

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 DollarReturnswithoutReinvestment 2,037,576

Only a small portion of the Total Dollar Returns are from the reinvestment income. Only

14.97%arefromreinvestmentincome,thereforeimplyingasmallreinvestmentrisk forEnergy

Development Corporations10year Fixed Income Bond. Even without reinvestment, it would

stillearnPhp2,037,57633.96%ofitsoriginalinvestmentofPhp6Million.

VI.Conclusion

In conclusion,we chosetoinvest40%ofourmoneyinabondthatslessthan5years

for maturity, which is Ayala Corporation,becauseofitsrapidlyexpandingservices.Givingthe

investor a higherchance of getting higher returns. Theother60%ofourmoneywillbegoing

to Energy Development Corporation because it has a strong potential of growth that offers

opportunities for investors.Moreover, ithas a relatively lowriskforitsmaturitydate,meaning

the money we will be investing is safer there and returns will be consistent and less

susceptible tofluctuations despite its long maturity. Italso hasahigheryieldcomparedtothe

5 year bond to maximize thereturnonthebondstructurewhileoffsettingtherisksofhaving2

bondsmatureinthesametimeperiod.

This was our plan of action in terms of investing because our hypothetical situation

allows us to be moderately aggressive, meaninghalfofour investmentswillbeplacedinhigh

risk situation and half would be safely growing while we focus most attention on the higher

risk investment. The timeframealso allows usto be cautious andlongtermwhenitcomesto

our investments, hence the5yearand10yearbondsthatwechose.WiththesebondsKelvin

willsurelyhaveenoughmoneytostarthisownbusiness10yearsfromnow.

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Sources:

http://www.investopedia.com/terms/b/bondladder.asp

http://www.pds.com.ph/index.html%3Fpage_id=1954.html

http://www.ap.jll.com/asiapacific/engb/Research/propertymarketmonitorphilippinesmanila
201502.pdf?f9a8b618dd9a4369b43e497662e85d13

http://www.bpihousingloans.com/pages?page=Whatcanweexpectfromtherealestateindu
stryin2015
http://www.energy.com.ph/aboutedc/thecompany/
http://www.energy.com.ph//edclistsphp7bfixedratebonds/

http://www.energy.com.ph/news/bondissue/
http://www.energy.com.ph//2009EDCBondsFinalProspectus.
http://www.pds.com.ph/

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