Bonds: Formulas & Examples
Bonds: Formulas & Examples
Bonds: Formulas & Examples
Bonds
Formulas & Examples
Basic bond valuation
Excel functions
Examples
Page 1
Bond Val
Basic Bond Valuation
Bond price (PV annuity + PV principal)
PV=PMT*(1-1/(1+R)^n)/R
Example
Coupon rate
Yield
Periods
PV
Answer
Price
8
8.00%
10
53.7
FV
Yield
Periods
PV
Answer
Coupon rate
Yield
Frequency
Periods
PV
Price
100
8.00%
10
46.32
$100.00
PV=FV/(1+R)^n
8
8.00%
2
10
54.4
PV=FV/(1+R/m)^n*m
FV
Yield
Periods
PV
$100.00
Page 2
100
8.00%
2
10
45.64
Excel functions
Bond calculations with Excel functions
Use PRICE function to find a bonds price
Settle date
Mat date
Rate
Yield
Frequency
Price
1/1/1997
1/1/2007
8%
9%
2
93.50
1/1/1997
1/1/2007
8%
95
2
8.76%
1/1/1997
1/1/2007
8%
8%
2
6.8
Page 3
Examples
Examples
1 Atlantic Bell issued 10-year bonds one year ago at a coupon rate of 9.25 percent. The bonds make
semiannual payments. If the YTM on these bonds is 7.15 percent, what is the current bond price?
Use the Excel PV function to calculate the current value of the bond.
Coupon rate
Yield to maturity
Years till maturity
Bond value
8.25%
12.00%
7
$82.57
2 IBM issued 12-year bonds two years ago at a coupon rate of 8.4 percent. The bonds make semiannual
payments. If these bonds currently sell for 97.5 percent of par value, what is the YTM?
Use Excel YIELD function
Bond value
Par value (redemption value)
Coupon rate (annual)
Years till maturity
Today
6/21/2015 Maturity
Yield to maturity
$95.88 41.16606
$100
4.00%
5
6/20/2020
4.95%
3 Stern Investments has 14 percent coupon bonds issued by Rotten Tree Inc with seven years to maturity. The bonds mak
semiannual payments and currently sell for 105 percent of par. What is the current yield on the bonds?
The YTM? The effective annual yield?
Use Excel YIELD and EFFECT functions
Bond value
Par value (redemption value)
Coupon rate (annual)
Years till maturity
Today
6/21/2015 Maturity
Current yield
Yield to maturity
Effective annual yield
$105.00
$100
14.00%
7
6/20/2022
13.33%
12.89%
13.31%
4 The YTM on a bond is the interest rate you earn on your investment if interest rates don't change. If you actually
sell the bond before it matures, your realized return is known as the holding period yield (HPY).
a. Suppose that today you buy a GE 9 percent coupon bond making annual payments of $1,200. The bond has
10 years to maturity. What rate of return do you expect to earn on your investment?
b. Two years from now, the YTM on your bond has declined by 2.5 percent, and you decide to sell. What
price will your bond sell for? What is the HPY on your investment? Compare this to the YTM when you
first bought the bond. Why are they different?
Use Excel YIELD and PRICE functions
Bond value
Par value (redemption value)
Coupon rate (annual)
$120.00
$100
9.00%
Page 4
Examples
10
6/20/2025
6.28%
2 years later
New yield
Par value (redemption value)
Coupon rate (annual)
Years till maturity
Today
6/20/2017 Maturity
New Price
3.78%
$100
9.00%
8
6/20/2025
135.78
$120.00
135.78
9.00%
2
6/20/2017
13.46%
1/1/1997
1/1/2003
8%
91.137
2
10.00%
10.25%
1/1/1997
1/1/2007
6%
91.19
1
Page 5
Examples
Yield
7.27%
1/1/1997
1/1/2002
9%
12%
1
Price
89.19
8 As a portfolio manager at Putnam Management, you bought a 10-year, 8.25% semiannual-pay bond at issuance
2 1/2 years ago. At that time the yield to maturity was 8.23%; it's now fallen to 7.10%. How much has the bond's
modified duration changed?
Settle date
Mat date
Rate
Yield
Frequency
Original
Present
1/1/1997
7/1/1999
1/1/2007
1/1/2007
8.25%
8%
8.23%
9%
2
2
Modified durati
6.7
5.5
9 You are the risk manager at a new savings bank, Lostyur Trust. Mr Edgar Lostyur, sole shareholder, has been
told by the regulatory authorities to provide them with the institution's modified duration in order to evaluate its
sensitivity to interest rate fluctuations. The Prime rate is 8.25%.
You find that the initial balance sheet of the savings bank looks like this:
Assets:
Cash on deposit
2 million face value
3-month loans at Prime + 2%
13 million face value
4-year, 6% s.a. Treasury bonds yielding
6.35%
20 million face value
7-year, 7.90% s.a. IBM bonds yielding
8.23%
6 million face value
Liabilities:
6-month CDs at 4%
5-year 9% s.a. bonds
Equity:
100,000 shares
What can you tell the regulators the bank's modified duration of assets is?
Of liabilities? And what is the net modified duration?
Based on the net duration, what would be the effect on net worth of a 10bp increase in rates?
Page 6
Examples
Item
Face value
Settle date
Mat date
Rate
Yield
Frequency
Price
Value
Modified durati
If rates rose by
and this is
Cash
2
1/1/1997
1/1/1997
100
2
0
98.78
19.76
3.5
98.27
5.90
5.3
Page 7
100.00
33.00
4.0
Equity
46.52
4.65
Examples
bonds make
ake semiannual
Page 8
Examples
Page 9
Examples
Page 10
Examples
Assets Liab.+Eq.
40.65
2.54
Net
40.65
3.25 -0.71
Page 11