Annual Percentage Rate

Input
Rate Convention: 1 = EAR, 0 = APR 0
Annual Coupon Rate (CR) 5%
Yield to maturity (YTM) 9%
Number of payment per year (NOP) 2
Number of periods to maturity (T) 8
Face Value (FV) $ 1,000.00

Outputs
Discount rate 4.5%
Coupon payment PMT $ 25.00

Calculate Bond price using the cash flows

Period 0 1 2 3 4
Time (Year) 0 0.5 1 1.5 2
Cash flows $ 25.00 $ 25.00 $ 25.00 $ 25.00
Present value of cash flow 23.92344 22.89325 21.90742 20.96403
Bond price 868.082279

Calculate Bond price using PV function $868.08

ntage Rate

5 6 7 8
2.5 3 3.5 4
$ 25.00 $ 25.00 $ 25.00 $ 1,025.00
20.06128 19.19739 18.370711 720.764755
 Example

Bond A
Face value $ 1,000.00
Maturity 10 years
Issue date 12/17/2002
Coupon rate 7%
No of coupon payments per year 1
curent interest rate 7%

QUESTION: find current bond prices and their duration

YTM 7%

Bond A
Year Ct t*Ct/Pa*(1+YTM)^t
1 70 0.0654205607
2 70 0.122281422
3 70 0.1714225541
4 70 0.2136106594
5 70 0.2495451628
6 70 0.279863734
7 70 0.3051473735
8 70 0.3259250986
9 70 0.3426782578
10 1070 5.4393374258

Bond price (Pa) $1,000.00 Bond price (Pb)

Duration 7.5152322488

Excel formula: Duration(settlement, maturity, coupon, yield, frequency, basis)

7.5152322488

Approximating price change using duration

Case: interest rate rises by 10 perecent (from 7% to 7.7%)

Actual Initial
price change Duration (D) price (P)
Bond A -47.61 7.5152322488 $1,000.00
Bond B -60.92 6.7535385303 $1,421.41

$1,000.00
1% 1568.2782718421
2% 1449.1292503121
3% 1341.208113471 Bond price by YTM
4% 1243.3268733807 1800
5% 1154.4346985837 1600
6% 1073.6008705142
7% 1000 1400
8% 932.8991860106 1200
9% 871.6468459768 Ｂｏｎｄ　ｐｒｉｃｅ
1000
10% 815.6629868289
11% 764.4307195544 800
12% 717.4888485795
600
13% 674.4253914428
14% 634.8719047594 400
15% 598.4985099317
200
16% 565.0095269388
17% 534.1396372267 0
1% 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
18% 505.6505075583 % % % % % % % %% %% % % % % %
19% 479.3278159648
20% 454.9786288784 YTM （％）
 Current date: 2002/12/17
Bond B
$ 1,000.00
15 years
12/17/1997
13%
1
7%

Bond B
t*Ct/Pb*(1+YTM)^t
130 0.085474922
130 0.159766209
130 0.223971322
130 0.27909199
130 0.326042044
130 0.365654629
130 0.398688847
130 0.425835885
130 0.447724645
1130 4.041288037

$1,421.41

6.75353853

6.75353853
 change in -D*P*dr/(1+r)
interest rate (dr)
0.7% -49.17
0.7% -62.80

Bond price by YTM

4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
% % % % % % %% %% % % % % % % %%

YTM （％）
 Effects of coupon and maturity on duration

Face value 1000 Effect of maturity on Duration

Coupon rate 4% (Coupon 4%, YTM 15%)
10
YTM 15%
8
Maturity, in years 21
6
Current date 12/17/2002

Duration
4
Maturity date 12/17/2023 2
0
Duration 9.01103195 1234567891111111111222222222233333333334444444444555555555
0123456789012345678901234567890123456789012345678
Maturity
Data table effect of maturity on duration

Maturity 21 years, YTM 15%

9.011032 25
1 1
20
2 1.957643
3 2.866713 15
4 3.721351
Duration

5 4.516304 10
6 5.247182 5
7 5.910666
8 6.504681 0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
9 7.028492
%%%%%%%%%%%%%%%%%%%
10 7.482723 Coupon rate (%)
11 7.869304
12 8.191342
13 8.452937
14 8.658962
15 8.814819
16 8.926204
17 8.998888
18 9.038526
19 9.050503
20 9.039823
21 9.011032
22 8.968176
23 8.914792
24 8.853911
 25 8.78809
26 8.719446
27 8.6497
28 8.580222
29 8.512081
30 8.446084
31 8.382822
32 8.322703
33 8.265991
34 8.212828
35 8.163262
36 8.117271
37 8.074774
38 8.035651
39 7.999753
40 7.96691
41 7.936943
42 7.909664
43 7.884886
44 7.862425
45 7.842099
46 7.823736
47 7.807173
48 7.792252
49 7.778829
50 7.766767
51 7.755941
52 7.746234
53 7.737539
54 7.729757
55 7.722798
56 7.716581
57 7.711029
58 7.706077
59 7.701661
60 7.697726

Data table effect of Coupon on duration

 9.011032
0% 21
1% 13.12041
2% 10.78654
3% 9.667702
4% 9.011032
5% 8.579184
6% 8.273577
7% 8.045914
8% 7.869748
9% 7.729383
10% 7.614911
11% 7.519773
12% 7.439452
13% 7.370736
14% 7.311281
15% 7.259331
16% 7.213551
17% 7.172903
18% 7.136569
19% 7.103898
20% 7.074362
maturity on Duration
n 4%, YTM 15%)

222222223333333333444444444455555555556
234567890123456789012345678901234567890
Maturity

y 21 years, YTM 15%

6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
% %% %% %% % %% %% % %%
Coupon rate (%)
 A basic numerical immunization example

1. Suppose you are trying to immunize a year-10 obligation whose present value is $1000.
(For example, at a current interesr rate of 6%, its futute value would be $1000*(1.06^10) = $

2. You consider three bonds:

1. Bond 1 has 10 years remaining until maturity, a coupon rate of 6.7%, and a face value of
2. Bond 2 has 15 years remaining until maturity, a coupon rate of 6.988%, and a face value
3. Bond 3 has 30 years remaining until maturity, a coupon rate of 5.9%, and a face value of

At the existing yield to maturity (YTM) of 6%, the prices of the bonds differ.

Bond 1 Bond 2 Bond 3

YTM 6%
Maturity year (T) 10 15 30
Coupon rate (CR) 6.70% 6.99% 5.90%
Face value (FV) $1,000 $1,000 $1,000
Interest payment (IR) $67.00 $69.88 $59.00 <-- =CR*FV $493.13

Price:
Bond 1 $ 1,051.52 <-- =-PV(YTM,T,IR) + FV/((1+YTM)^T)
Bond 2 $ 1,095.96
Bond 3 $ 986.24

Note: In order to purchase $1,000 worth of bond 1, you have to to purchase $951 = $1,000/$1,051
In order to purchase $1,000 worth of bond 3, you have to to purchase $1013.96 = $1,000/$$

Bond price: Bond 1 Bond 2 Bond 3

$ 1,051.5 $ 1,096.0 $ 986.24
Face value equal to $951.00 $ 912.44 $1,013.96
$1,000 of market value
Duration #VALUE! #VALUE! #VALUE! <--= dduration(D15,D16,YTM,1)

Bond 1 Bond 2 Bond 3

Bond price $1,000.00 $1,041.62 $988.53
Reinvested coupons $883.11 $921.07 $777.67
Total $1,883.11 $1,962.69 $1,766.20

Multiply by percent of $1,790.85 $1,790.85 $1,790.85

face value bought
 Now suppose the YTM falls to 5%
YTM 5%
Bond 1 Bond 2 Bond 3
Bond price $1,000.00 $1,086.07 $1,112.16
Reinvested coupons $842.72 $878.94 $742.10
Total $1,842.72 $1,965.01 $1,854.26

Multiply by percent of $1,752.43 $1,792.97 $1,880.14

face value bought
Bond 1 Bond 2 Bond 3 Bond 1 Bond 2
$1,752.43 $1,792.97 $1,880.14 0% 1588.176 1868.869
0% 1588.1762 1868.8689 2808.660741 1% 1617.627 1844.71
1% 1617.6271 1844.71 2536.415973 2% 1648.69 1825.139
2% 1648.6898 1825.139 2315.613468 3% 1681.451 1810.048
3% 1681.4506 1810.0478 2137.23432 4% 1716 1799.347
4% 1715.9998 1799.3472 1994.023923 5% 1752.432 1792.966
5% 1752.4324 1792.9655 1880.135298 6% 1790.848 1790.848
6% 1790.8477 1790.8477 1790.847697 7% 1831.35 1792.955
7% 1831.3498 1792.9548 1722.344048 8% 1874.048 1799.263
8% 1874.0476 1799.2629 1671.53448 9% 1919.055 1809.763
9% 1919.0554 1809.7627 1635.916046 10% 1966.493 1824.459
10% 1966.4926 1824.4591 1613.460957 11% 2016.484 1843.37
11% 2016.4841 1843.3703 1602.527313 12% 2069.161 1866.528
12% 2069.1608 1866.5278 1601.787644 13% 2124.659 1893.976
13% 2124.6594 1893.9758 1610.171578 14% 2183.123 1925.771
14% 2183.1229 1925.7713 1626.819735 15% 2244.701 1961.983
15% 2244.7008 1961.9831 1651.046589 16% 2309.549 2002.693
16% 2309.5491 2002.6925 1682.310474 17% 2377.831 2047.993
17% 2377.8309 2047.9926 1720.189323 18% 2449.717 2097.988
18% 2449.7168 2097.9883 1764.361015 19% 2525.384 2152.796
19% 2525.3844 2152.7963 1814.587411 20% 2605.02 2212.545
20% 2605.0195 2212.545 1870.701391

3000

2500

2000

1500
Bond
1000 Bond
 2500

2000

1500
Bond
1000 Bond
Bond
500

0
012345678911111111112
%%%%%%%%%%0 1 2 3 4 5 6 7 8 9 0
%%%%%%%%%%%

Convexity

Bond price: Bond 1 Bond 2 Bond 3

1051.5206 1095.957 986.2351688
Face value equal to 951.00371 912.44454 1013.956946
$1,000 of market value
Duration 7.665498 10.000009 14.6360603

Proportion of bond 1 0.6650913

Proportion of bond 3 0.3349087

Duration of bond portfolio

10
ld be $1000*(1.06^10) = $1,790.85)

6.7%, and a face value of $1000.

6.988%, and a face value of $1000.
5.9%, and a face value of $1000.

558.3948 $1,051.52

(1+YTM)^T)

ase $951 = $1,000/$1,051.52 of fave value of the bond

ase $1013.96 = $1,000/$$986.24 of fave value of the bond
Bond 3
2808.661
2536.416
2315.613
2137.234
1994.024
1880.135
1790.848
1722.344
1671.534
1635.916
1613.461
1602.527
1601.788
1610.172
1626.82
1651.047
1682.31
1720.189
1764.361
1814.587
1870.701

Bond 1
Bond 2
 Bond 1
Bond 2
Bond 3

1112
7890
%%%%