From: Chris Tham

Subj: Bond Pricing Application

Date: 25 Nov 91

HP-48SX Bond pricing application Version 1.0

Copyright (C) 1991 Chris Tham (christie@extro.ucc.su.oz.au)

Introduction

The BOND application allows your HP-48SX to act as a sophisticated bond

pricing calculator, with features above and beyond that incorporated in
most financial calculators, including ones manufactured by
Hewlett-Packard. Indeed, it has features similar to bond pricing
programs normally found on personal computers but retains the ease of
use and flexibility of keystroke oriented bond pricing functions found
on financial calculators.

The BOND application has the following features:

* Continuous display of all relevant bond pricing parameters (settlement
and maturity dates, coupon and yield rates, bond price) on screen
during data entry.
* Calculates bond price using the Reserve Bank of Australia pricing
formulae, with extensions to support bonds with different coupon
payment frequencies and ex-interest periods.
The RBA bond pricing formula is compatible with the Securities
Industry Association's recommendations.
* User can view the RBA bond pricing parameters (i, y, g, x, n, f, d)
on screen to verify correct calculation.
* Bond pricing is compatible with the bond functions available on the
Hewlett-Packard range of financial calculators (including the HP-12C).
* Calculation of bond price, capital price, accrued interest, implied
yield, implied coupon, duration, modified duration, convexity,

dispersion, PVBP (Price Value for a Basis Point change in yield).

How to use the BOND Application

The BOND application is normally stored in a subdirectory on the HP-48SX

called `BOND'. To use the application, simply enter the directory and
either type the `GO' command or press the [VAR] menu key and then press
the soft key marked [GO] (this should be the left most soft key if you
have not created any variables in this directory). The screen should
now display something like the following:

{ HOME BOND }

Settlement 22-Nov-1991

Maturity 15-Nov-2000
Coupon
Yield

12.00%
10.500%

Bond Price 108.812

SETTLMATU CPN YIELDPRICE RBA

The soft keys at the bottom corresponds to keys for

* SETTLement date
* MATUrity date
* CouPoN rate per annum
* YIELD of bond if held to maturity
* Bond Gross (Total) PRICE

* RBA (Reserve Bank of Australia) Pricing Parameters

If you press the [NXT] (Next Menu) key, the soft menus will successively
show the following soft keys:
* [CAPL] (Calculate bond capital price)
* [ACCR] (Calculate bond accrued interest)
* [DUR] (Calculate bond duration)
* [MDUR] (Calculate bond Modified duration)
* [CONV] (Calculate bond convexity)
* [DISPR] (Calculate bond dispersion)
* [PVBP] (Calculate change in bond Price Value per 1 Basis Point change in
yield)
* [FREQ] (Change coupon frequency per annum)
* [EXINT] (Change coupon ex-interest period)

The settlement date is entered into the system by typing in a date as a

number of the form DD.MMYYYY or MM.DDYYYY (depending on flag -42 in
the
calculator) and then pressing the [SETTL] key. The display should
automatically update to show the new settlement date. The calculator
does not check that the settlement date falls on a business day, or even
if it is in the right format, so be careful. Entering a nonsensical
date will cause the program to crash.

The maturity date of the bond is similarly entered into the system by
typing in the date in the current HP-48SX date format and then pressing
the [MATU] key. The display will automatically update to show the new
maturity date.

The annual coupon rate must be entered as a percentage and then followed
by the [CPN] key. The system displays coupon rates to 2 decimal places.

The desired or actual yield to maturity of the bond must be entered as a

percentage followed by the [YIELD] key. The system displays yields to
three decimal places.

The bond gross price per $100 face value is entered into the system by
typing in the price and then pressing the [PRICE] key. The system
displays the price to 3 decimal places.

To calculate the bond price, implied yield or implied coupon, enter the
remaining (known) parameters as outlined above and then calculate the
unknown parameter by pressing the appropriate key preceeded by the left
(orange) shift key.

To retrieve the current value of any parameter, press the appropriate

key preceeded by the right (blue) shift key.

Let's run through the examples given in the HP-12C Owner's Handbook and
Problem-Solving Guide (Reorder Number 00012-90001 Edition 1, Copyright
(C) Hewlett-Packard Company 1982, July 1987) on pages 76-78.

Example 1:
What price should you pay on April 28, 1982 for a 6 3/4% US Treasury
bond that matures on June 4, 1996, if you want a yield of 8 1/4%?

Lets assume our current date format is DD.MMYYYY. Key sequence will be
28.041982 [SETTL]
4.061996 [MATU]
6 [SPC] 3 [SPC] 4 / + [CPN]
8 [SPC] 1 [SPC] 4 / + [YIELD]
[Left Shift] [PRICE]

The screen will show:

{ HOME BOND }

Settlement 28-Apr-1982

Maturity 4-Jun-1996
Coupon
Yield

6.75%
8.250%

Bond Price 90.311

SETTLMATU CPN YIELDPRICE RBA

Hence, the total bond price is $90.311 per $100 face value (including
accrued interest). Note that although the bond price is given to three
decimal places the full precision is stored internally. To find out
the capital and accrued interest components, press the [NXT] key. The
screen will clear and the soft keys will now say [CAPL] [ACCR] [DUR]
[MDUR] [CONV] [DISPR]. Press the [CAPL] key, then the [ACCR] key.
Depending on the setting of your numeric display format (mine is on FIX
2) you should get something like "Capital: 87.62" on level 2 of your
stack and "AccrInt: 2.69" on level 1. Pressing the [PREV] key ([Left
Shift] [NXT]) will bring you back to the previous soft key menu and
pressing [Left Shift] [SETTL] will restore the screen display of bond
parameters.

The RBA pricing parameters for the above bond can be obtained by
pressing the [RBA] key which should show something like:


n 28

f 37

d 182
x 1

g 3.375

i .04125

v .960384153661

SETTLMATU CPN YIELDPRICE RBA

Pressing any key (except the [ON] key, of course!) will restore the bond
parameter screen.

Example 2:
The market is quoting 88 3/8% for the bond described in Example 1. What
yield will that provide?

We first need to find the gross price corresponding to the quoted

capital price, then we can find the implied yield. The key sequence is
88 [SPC] 3 [SPC] 8 / +
[NXT] [ACCR] + [PREV] [PRICE]
[Left Shift] [YIELD]

After a few seconds, the display will show that the corresponding yield
is 8.151%.

To calculate bond characteristics such as duration, modified duration,

convexity, dispersion, and PVBP simply press the appropriate key.
For the bond given in example 2, the relevant values are

Duration = 8.71
Modified Duration = 8.37
Convexity = 98.66
Dispersion = 5.16
PVBP = 0.08
Note that PVBP/PRICE * 10,000 approximately equals the Modified
duration. This is a consequence of the method used to calculate
Modified duration.

The last two soft keys ([FREQ] and [EXINT]) allows you to change the
coupon payment frequency per annum and ex interest period of the bond.
By default, FREQ = 2 and EXINT = 15. Pressing either [FREQ] or [EXINT]
will display the current settings of FREQ and EXINT respectively. To
enter a new coupon frequency, just type the number of coupon payments
per year and press [Left Shift] [FREQ] and to enter a new ex interest
period, just type the minimum number of days to the next interest period
from settlement date before the bond goes ex-interest then press
[Left Shift] [EXINT].

The BOND application currently does not handle bonds calculated on a

30/360 day basis.