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Unit 5.6-7
Life Cycle Costs and Bonds
Dr. J. Michael Bennett, P. Eng., PMP,
UOIT,
Version 2014-I-01
Change Record
2014-I-01 Initial Creation
Text Chapter 5
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Types of Bonds
Type
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Issued By
Characteristics
Examples
Treasury
securities
Ottawa
Backed by
Canada
Bills
Marketable bond
Premium bonds
Savings bonds
Provincial
Provinces
May be
guaranteed
Bonds
Municipal
Local
governments
Issued against
taxes received
Bonds
Mortgage
Corporation
Backed by house
1st mortgage
2nd mortgage
Reverse mortgage
Debenture
Corporation
Backed by
reputation
Convertible
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Repayment
of the face
value
Bond Purchase, V at t = 0
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Example 5.6
Loblaw Ltd. Has issued $5,000,000 worth of $5,000 ten-year
debenture bonds. Each bond pays interest quarterly at 6%.
(a) Determine the amount a purchaser will receive each 3 months
and after 10 years.
(b) Suppose a bond is purchased at a time when it is discounted
by 2% to $4900. What are the quarterly interest amounts and
the final payment at maturity date?
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Solution
(a) The quarterly interest is (5000)(0.06)/4 = $75 and $5000 is
repaid after 10 years
(b) The discount dos not change either the interest or the final
repayment amounts.
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Discounting a Bond
Bonds are seldom purchased for their face value
Most of the time a bond is discounted in the bond
market by a few percentage points
But the face value and the periodic dividend
payments remain unchanged
For example, V = $10,000 bond purchased for 98%
of V now, but repays full face value, V, in 10 years
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$5,000
A = $112.50
0
PW = ? (willing to pay)
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19
20
$5,000
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Spreadsheet Applications PW
Analysis and Payback Period
Review the Excel financial functions
NPV and PV functions are useful analysis
tools built into Excel
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Chapter Summary
PW method requires comparison over same number of
years equal service comparison
Alternative comparison using PW select the alternative
with the numerically larger PW value, that is, higher new
positive cash flow value, or lower net cost in PW terms
Extension of PW method are: capitalized cost, life-cycle
costs, payback period, bonds
Never use payback period as the primary selection
method; only as supplemental with other methods such
as PW, FW, AW or ROR (as covered in later chapters )
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