About Fixed coupon Central Government Securities ( also called GSecs or Gilts)

1 What does "7.28%GS2035" mean? (refer to the worksheet "trade_data1")

It means a central government security carrying coupon of 7.28% maturing in 2
2 Whar is the face value of central government securities
INR 100
3 What is the frequency and periodicity of coupon payment?
Twice a year, every six months
4 How to calculate coupon in INR?
Coupon rate is on face value. 7.28% coupon means INR 3.64 per unit paid every
5 What is the redemption amount ?
Redemption is always at par ie INR 100
6 What is day count convention for Central Government Securities?
30/360 European
This means 30 days to be taken for every month and 360 days every year as pe
7 How to calculate yield to maturity if price of central government security is give
Using the MS Excel formula "yield" as illusrated below:
settlement date 8/1/2018
Maturity date 5/25/2025
Coupon rate 7.28% p.a.
Price 99.76
yield 7.32% =YIELD(D17,D18,D19,D20,100,2,4)
Note that this Yield is quoted as % p.a. compounded half yearly.
Effective annual rate is 7.46%
8 How to calculate price given yield?
Using the MS Excel formula "price" as illusrated below:
settlement date 8/1/2018
Maturity date 5/25/2025
Coupon rate 7.28% p.a.
yield 7.32%
Price 99.7600000000001 =PRICE(D26,D27,D28,D29,100,2,4)
9 What is called "clean price"? What is "accrued interest"? What is total price?
Price calculated above is called clean price.
 Buyer of the bond will receive coupon on 25th November 2018 of INR 3.64 for
But the buyer is entitled to the interest for the period of 1st August to 25th No
The period from 25th May 2018 to 1st August 2018 is called "broken period".
Buyer pays interest for the broken period along with the clean price to the selle
Interest for the broken period is called accrued interest.
Total price = clean price + accrued interest
In the case in 8 above,
broken period is calculated using 30/360 European convention using MS Excel "
Broken period 66 days
Accrued interest 1.33
Clean price 99.76
Total price 101.09
10 How can modified duration and Macaulay duration be calculated for central go
Modified duration: use MS Excel Mduration formula
Macaulay duration: use MS Excel duration formula
Refer to the worksheet "reconciling yield and modified duration" to verify yield
11 Term structure
Market rates of interest vary depending upon the tenor. Longer tenors usually
Typical structure of discount rates for central government securities is shown in
CCIL calculates these rates using actual trade data for zero coupon rates of secu
12 What is key rate duration?
Rates for key tenors such as 1 year, 5 years, 10 years are actively monitored by
Change in bond price due to 1% change in any one of the key rates is called key
13 What are forward rates?
Expected interest rates in future given the current term structure are called Fo
14 Under which term structure theory Forward rates as calculated do not hold?
Under the "Market segmentation" theory, it is believed that market participant
Hence prices may not fully adjust through arbitrage mechanism and the forwar
forward rates are not indicative of expecetd future interest rates.
15 What does "sovereign issuance" mean?
Central government securities issued by any country carry nil credit risk in dom
16 How do government securities set benchmarks for interest rates?
Companies issuing debentures/bonds carry credit rating and hence a spread ov
Thus the Gsecs set benchmark interest rates in local currency in any economy.
 GSecs or Gilts)
et "trade_data1")
of 7.28% maturing in 2035

64 per unit paid every six months

curities?

days every year as per the European 30/360 convention.

rnment security is given?

8,D19,D20,100,2,4)

7,D28,D29,100,2,4)
What is total price?
 2018 of INR 3.64 for the entire period of 25th May to 25th November 2018
1st August to 25th November.
ed "broken period".
clean price to the seller at the time of the settlement.

ntion using MS Excel "days360" formula.

culated for central government securities?

uration" to verify yield and modified duration using first principles for central government secur

Longer tenors usually have higher rates.

t securities is shown in the worksheet "Term structure"
o coupon rates of securities of various tenors and fills the tenor gaps using a statistical model.

actively monitored by market participants.

key rates is called key rate duration. This is illustrated in P2Q2

tructure are called Forward rates. Illustrated in P2Q3

ulated do not hold?
hat market participants for the longer tenor bond markets do not engage in trading short term.
hanism and the forward rates may not hold. Also, in case of Biased Expectation theories,
est rates.

y nil credit risk in domestic currency. They are called "sovereign issuances".
st rates?
and hence a spread over and above the rates for the government securities.
ency in any economy.
overnment securities

atistical model.

ading short term.

theories,
7.28%GS2025
Given
settlement date 8/1/2018
Maturity date 5/25/2025
Coupon rate 7.28% p.a. payable twice a year
Clean Price 99.76

Calculate YTM 7.32% p.a. compounded half yearly

7.28%GS2025
Given
settlement date 8/1/2018
Maturity date 5/25/2025
Coupon rate 7.28% p.a.
YTM 7.32% p.a. Mod D= 5.229558
Mac Duration= 5.421025
Calculate clean price 99.76

Previous coupon date 5/25/2018

Settlement date 8/1/2018

Broken period 66 days

Accrued interest 1.33

Calculate Total price 101.09

5.421025
 14/Aug/18 16/Aug/18 Note: The user can compare the zero coupon yield
movements, by clicking "cell B 1" and selecting any date
Beta 0 7.9755 7.9676
provided in the drop down box
Beta 1 -1.7505 -1.7246
Beta 2 0.0001 0.0001
Tau 1 1.0376 0.9918
Beta 3 0.9577 1.0820
Tau 2 4.1749 4.2596
Movement of Zero C
Maturity (Yrs) 14/Aug/18 16/Aug/18
0.0 6.23 6.25
0.5 6.64 6.67 8.45
1.0 6.95 6.99 8.35
1.5 7.19 7.23 8.25
8.15
2.0 7.37 7.41 8.05
2.5 7.51 7.56 7.95
3.0 7.62 7.67 7.85
7.75
3.5 7.71 7.76 7.65
Zero Coupon Rate (%)
4.0 7.78 7.83 7.55
4.5 7.84 7.88 7.45
7.35
5.0 7.88 7.93
7.25
5.5 7.92 7.97 7.15
6.0 7.95 8.00 7.05
6.95
6.5 7.98 8.02
6.85
7.0 8.00 8.05 6.75
7.5 8.02 8.06 6.65
8.0 8.03 8.08 6.55
6.45
8.5 8.05 8.09 6.35
9.0 8.06 8.10 6.25
9.5 8.06 8.10 6.15
6.05
10.0 8.07 8.11 5.95
10.5 8.08 8.11 5.85
11.0 8.08 8.12 0.00
2777
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

7777
11.5 8.08 8.12 7777
778
12.0 8.08 8.12 6.22 46.94
7623 3
9978
7.36
7282
7.61
9985
7.77
9786
7.88
4289
7.95
4228
8.00
1641
8.03
3874
8.05
5617
8.06
9983
8.07 8.08 8.08 8.08 8.08
9102 4465 7138 7890 7283
8.08
5727
8.08
3526
T
8.0
090
12.5 8.09 8.12 2506 3
0874
9444 2
3997
5997
6158
2321
907
0155
9061
3508
1649
5797
6195
2822
5995
1042
1173
6635
8123
8828
6323
2586 3462 1269 2975 0143
1305 7 9396 6999 595
5957
1178
2941
4302
212
459
6
13.0 8.09 8.12 6.24 46.99 7.41 7.66 7.82 7.92 7.99 8.04 8.07 8.09 8.10 8.11 8.12 8.12 8.12 8.11 8.11 8.11 8.1
5727 3
0004 3153 6821 6232 9980 9018 5408 6493 6969 9968 7641 1510 2662 1890 9773 6737 3094 907
13.5 8.09 8.12 7600 3
6587
3779 2
7573
7762
0222
0694
2368
9770
4067
8382
8087
4725
9028
3588
6989
3072
2246
9008
3463
0258
159
7989
3249
0706
6097
6211
4192
8322
0003
8384
8915
2308
8818
1359
3756
571
116
14.0 8.09 8.12 8

14.5 8.09 8.12

15.0 8.09 8.12
15.5 8.09 8.12
16.0 8.09 8.12
16.5 8.08 8.11
17.0 8.08 8.11
17.5 8.08 8.11
18.0 8.08 8.11
18.5 8.08 8.11
19.0 8.08 8.10
19.5 8.08 8.10
20.0 8.07 8.10
20.5 8.07 8.10
21.0 8.07 8.10
21.5 8.07 8.09
22.0 8.07 8.09
22.5 8.07 8.09
23.0 8.07 8.09
23.5 8.06 8.09
24.0 8.06 8.08
24.5 8.06 8.08
25.0 8.06 8.08
25.5 8.06 8.08
26.0 8.06 8.08
26.5 8.06 8.07
27.0 8.05 8.07
27.5 8.05 8.07
28.0 8.05 8.07
28.5 8.05 8.07
29.0 8.05 8.07
29.5 8.05 8.06
30.0 8.05 8.06
30.5 8.05 8.06
31.0 8.05 8.06
31.5 8.04 8.06
32.0 8.04 8.06
32.5 8.04 8.06
33.0 8.04 8.05
33.5 8.04 8.05
34.0 8.04 8.05
34.5 8.04 8.05
35.0 8.04 8.05
35.5 8.04 8.05
36.0 8.04 8.05
36.5 8.04 8.05
37.0 8.03 8.05
37.5 8.03 8.04
38.0 8.03 8.04
38.5 8.03 8.04
39.0 8.03 8.04
39.5 8.03 8.04
40.0 8.03 8.04
Movement of Zero Coupon Yields (N-S-S)

1 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40

07 8.08 8.08 8.08 8.08 8.08 8.08 Tenor

8.08 (In8.07
8.07 8.07 Yrs)
8.06 8.06 8.06 8.05 8.05 8.05 8.05 8.04 8.04 8.04 8.04 8.04 8.03 8.03 8.03 8.03 8.03 8.03 8.02
02 4465 7138 7890 7283 5727 3526 0901 8015 4986 1902 8822 5790 2837 9980 7232 4600 2086 9690 7410 5242 3182 1225 9366 7600 5921 4324 2804 1357 9979
86 3462 1269 2975 0143 5957 2941 2127 1539 8450 1672 4986 9469 0238 1596 3496 1468 1627 1939 0674 2707 4204 6069 6466 2640 2200 4015 8811 9550 1643
05 7 9396 6999 595 1178 4302 4594 1812 1171 4577 8109 9256 799 794 0534 4401 187 584 5014 9481 6573 3038 8893 4611 0164 0409 5156 0557 369

11 8.12 8.12 8.12 8.11 8.11 8.11 8.10 8.10 8.10 8.09 8.09 8.08 8.08 8.07 8.07 8.07 8.06 8.06 8.06 8.06 8.05 8.05 8.05 8.05 8.04 8.04 8.04 8.04 8.03
41 1510 2662 1890 9773 6737 3094 9074 4846 0532 6220 1971 7828 3819 9963 6268 2739 9377 6178 3138 0250 7509 4906 2434 0087 7856 5734 3716 1794 9963
89 0706 6211 8322 8384 2308 1359 5714 7670 8426 4442 4411 4564 7888 1287 3650 7073 2847 3508 1863 7726 2912 4903 9511 2780 2320 8203 3548 4867 2233
49 6097 4192 0003 8915 8818 3756 1167 6642 2659 9018 4759 1541 8622 07 984 2049 1488 3473 4748 836 8752 5986 1686 6682 4621 4636 7676 1145 6864
0.0 6.23 6.25
1.0 6.95 6.99
2.0 7.37 7.41
3.0 7.62 7.67
4.0 7.78 7.83
5.0 7.88 7.93
6.0 7.95 8.00
7.0 8.00 8.05
8.0 8.03 8.08
9.0 8.06 8.10
10.0 8.07 8.11
11.0 8.08 8.12
12.0 8.08 8.12
13.0 8.09 8.12
14.0 8.09 8.12
15.0 8.09 8.12
16.0 8.09 8.12
17.0 8.08 8.11
18.0 8.08 8.11
19.0 8.08 8.10
20.0 8.07 8.10
21.0 8.07 8.10
22.0 8.07 8.09
23.0 8.07 8.09
24.0 8.06 8.08
25.0 8.06 8.08
26.0 8.06 8.08
27.0 8.05 8.07
28.0 8.05 8.07
29.0 8.05 8.07
30.0 8.05 8.06
31.0 8.05 8.06
32.0 8.04 8.06
33.0 8.04 8.05
34.0 8.04 8.05
35.0 8.04 8.05
36.0 8.04 8.05
37.0 8.03 8.05
38.0 8.03 8.04
39.0 8.03 8.04
40.0 8.03 8.04
Compute the values of X for the central government securities as given below:
Settlement date 8/16/2018
effectiv
e
sr maturity yield till annual clean
Description maturit
no date y rate till price
maturit
y
1 7.17% GS 2028 1/8/2028 7.86% 8.02% 95.46
2 6.84% GS 2022 ### 7.89% 8.05% 96.19
3 6.68% GS 2031 9/17/2031 8.05% 8.21% 89.07
4 7.59% GS 2026JAN 1/11/2026 8.08% 8.24% 97.30
5 6.57% GS 2033 12/5/2033 8.17% 8.34% 86.1643
6 7.37% GS 2023 4/16/2023 7.92% 8.08% 97.87
7 X% GS 2045 6/22/2045 8.16% 8.33% 99.3228
8.099%
8 A gilt fund has 10,000 units of each of the above 7 securities.
If interest rates go down by 0.25% p.a., what is the expected % increase in the NAV

Assume that an instrument is available with negative duration of -0.23. What value
9 to restrict the overall portfolio duration to 5 in case of 8 above.

10 If 1 year spot rate is 7.65% p.a. and 3 year spot rate is 7.75% p.a. then what is the e
If expected 1 year rate two years from now is 7.90% p.a., what is the spot rate for

Year Spot rate

1 7.65%
3 7.75%
 FR (1x3)= 7.80%

FR (2x3)= 7.90%
Spot rate for 3 yrs= 7.75%

(1+R2)^2*(1+FR(2x3)^1= (1+R3)^3

Spot 2 year rate= 7.68%

s as given below:

Number of
accrue
days since d total Modified Macaula No of
the last y Value
coupon interes price duration duration Bonds
t
date

38 0.7568 96.217 6.6166 6.8767 10000 954600

57 1.083 97.27 3.6336 3.7769 10000 961882
149 2.7648 91.83 8.0644 8.3888 10000 890664
35 0.7379 98.04 5.5075 5.7300 5.73 10000 972978
71 1.2958 87.46 8.9201 9.2844 10000 861643
120 2.4567 100.33 3.78 3.9285 10000 978726
54 1.2149 100.54 10.7098 11.1468 10000 993228
100.54 11.14 6613721
ties.
ted % increase in the NAV of the fund 1.68%

Weight of
ation of -0.23. What value of this instrument is needed
bove. new
bond=
Value of
new
bond=
5% p.a. then what is the expected 2 year rate one year from now?
what is the spot rate for two years?
 weights Product

0.1443363 0.9550
0.1454373 0.5285
0.1346692 1.0860
0.147115 0.8102
0.1302811 1.1621
0.1479842 0.5594
0.1501769 1.6084
6.7096
Portfolio
Duration

Portfolio
0.2463 Duration= 5.0004

2161284
Year Spot deposit rate Spot borrowing rate
1 5% 6.10%
2 5.25% 6.20%
3 5.40% 6.30%
4 5.70% 6.50%
5 6% 6.80%

Forward Rate
Deposit Borrowing
5.20% 2x4 3x5 8.93%
5.87% 2x5 4x5
5.57% 1x4 2x5
5.05% 1x3 1x5