S2: Bond Pricing – Spreadsheet Applications 1

Transforming the Bond Pricing Equation into an EXCEL Spreadsheet

During the cum interest period, the settlement price P0 & quoted price Padj are defined as:
P ′ + CPP
P0 = , where P ′ = CPP × PVA(r , t ) + 100 × PVF (r , t ) , and Padj = P0 − CPP × (1 − f )
(1+ r ) f

During the ex interest period,

P′
P0 = , and Padj = P0 + CPP × f .
(1+ r ) f

The following inputs and their respective purposes are summarised below:
• Valuation/Transaction date → to obtain the corresponding settlement date, i.e., T+2
• Previous & Next coupon payment dates → to compute the fractional period from
settlement to the NCPD, i.e., f
• Maturity date → to determine the exact number of (six-month) periods from the NCPD to
maturity, i.e., t
• Yield to maturity → to obtain the discount rate per period, i.e., r
• Coupon rate → to calculate the amount of coupon interest per period, i.e., CPP

Let’s look at Table C in worksheet BP-2 to see how the above bond pricing equations are
applied to generate the settlement and quoted prices of the 6.5% May 2013 CGB.
S2: Bond Pricing – Spreadsheet Applications 2
Stage 1: Gather Information

B C D E F G H
10 Valuation Previous Next Yield
11 or Coupon Coupon To Coupon
12 Transaction Settlement Maturity Payment Payment Maturity Rate
13 Date Date Date Date Date (%) (%)
14
15 +2 working days YTM C
16 25/07/05 27/07/05 15/05/13 15/05/05 15/11/05 5.345% 6.50%

A Timeline of Relevant Dates

15/05/05 15/11/05 15/05/06 15/11/06 15/05/07 ……. 15/05/12 15/11/12 15/05/13

next coupon payment date relative to the settlement date

settlement date on 27/07/05
previous coupon payment date relative to the settlement date
S2: Bond Pricing – Spreadsheet Applications 3
Stage 2: Compute P', the present value of all the cash flows beyond the next coupon
payment date on the next coupon payment date

I J K L M N
8 Present Value
9 Periods of Cash Flows
10 Between Discount Present BEYOND
11 the NCPD Rate Coupon Value Present The NCPD
12 & Per Per Annuity Value ON
13 Maturity Period Period Factor Factor the NCPD
15 t r CPP PVA(r,t) PVF(r,t) P'
16 15 2.6725% 3.250 12.2257 0.6733 107.060

A Timeline of Cash Flows Beyond the Next Coupon Payment Date on 15/11/2005

P' cash flows beyond the next coupon payment date

$3.25 $3.25 $3.25 ……. $3.25 $3.25 $3.25 + $100

15/05/05 15/11/05 15/05/06 15/11/06 15/05/07 ……. 15/05/12 15/11/12 15/05/13

next coupon payment date

settlement date on 27/07/05
previous coupon payment date
S2: Bond Pricing – Spreadsheet Applications 4
Stage 3: Determine if the Bond is Cum/Ex Interest & Compute the Settlement Price

O P Q R S
6 Days Between
8 Settlement
9 Date Previous Cum
10 & Next & Next Fractional Or
11 Coupon Coupon Periods Ex
12 Payment Payment To Interest Settlement
13 Date Date Maturity Dummy Price
15 m n f = m/n DV P0
16 111 184 0.603 1 108.569

A Timeline of Cash Flows Up to the Next Coupon Payment Date

P' PV of cash flows beyond 15/11/05 on the next coupon payment date
P0 $3.25 CPP on 15/11/05 is included since the bond is cum-interest

15/05/05 15/11/05

next coupon payment date

settlement date on 27/07/05
previous coupon payment date

The dummy variable ensures that CPP is added to P′ if and only if the bond is cum
interest.
S2: Bond Pricing – Spreadsheet Applications 5
Stage 4: Compute Padj, the Quoted Price

T
8 Quoted
9 Price
10 Adjusted
11 For
12 Accrued
13 Interest
15 P0
16 107.280

Adjustment for Accrued Interest

Padj = P0 – CPP(1-f) if DV = 1, P0 + CPP× f otherwise.

(1-f) f

15/05/05 15/11/05

next coupon payment date

settlement date on 27/07/05
previous coupon payment date