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Bonds

Formulas & Examples

Basic bond valuation

Excel functions

Examples

Copyright (c) 1997 Ian H Giddy

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 Bond Val

Basic Bond Valuation

Bond price (PV annuity + PV principal)

PV=PMT*(1-1/(1+R)^n)/R

Example Coupon rate 8

Yield 8.00%
Periods 10
PV 53.7

Answer Price $104.63

Bond price with semi-annual payments

PV=(PMT/m)*(1-1/(1+R/m)^n*m)/(R/m)

Example Coupon rate 8

Yield 8.00%
Frequency 2
Periods 10
PV 54.4

Answer Price $100.00

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 Bond Val

on
Face Value = Rs 1000
PV principal) Maturity= 5 years
Coupon Rate = 12 %
PV=FV/(1+R)^n Frequency = Semi annually
Redemption ar maturity = 5 %
FV 110
premium
Yield 8.00% Market Yield = 14%
Periods 10
PV 50.95 Calculate the price of the Bon

yments
PV=FV/(1+R/m)^n*m

FV 100
Yield 8.00%
2
Periods 10
PV 45.64

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 Bond Val

Time Cash Flow PVF PV

e = Rs 1000 1 60 0.935 56.07477
5 years 2 60 0.873 52.40632
ate = 12 % 3 60 0.816 48.97787
= Semi annually 4 60 0.763 45.77371
on ar maturity = 5 % 5 60 0.713 42.77917

6 60 0.666 39.98053
eld = 14% 7 60 0.623 37.36498
8 60 0.582 34.92055
the price of the Bond 9 60 0.544 32.63602
10 60 0.508 30.50096
10 1050 0.508 533.7668

Bond Price 955.1816

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 Excel functions

Bond calculations with Excel functions

Use PRICE function to find a bonds price

Settle date 1/1/1997

Mat date 1/1/2007
Rate 8%
Yield 9%
Frequency 2

Price 93.50

Use YIELD function to find a bond's yield to maturity

Settle date 1/1/1997

Mat date 1/1/2007
Rate 8%
Price 95
Frequency 2

Yield 8.76%

Use MDURATION function to find a bond's modified duration

Settle date 1/1/1997

Mat date 1/1/2007
Rate 8%
Price 8%
Frequency 2

Modified duration 6.8

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 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 8.25%
Yield to maturity 12.00%
Years till maturity 7
Bond value $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 $95.88 41.16606
Par value (redemption value) $100
Coupon rate (annual) 4.00%
Years till maturity 5
Today 6/22/2020 Maturity 6/22/2025

Yield to maturity 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 $105.00
Par value (redemption value) $100
Coupon rate (annual) 14.00%
Years till maturity 7
Today 6/22/2020 Maturity 6/23/2027

Current yield 13.33%

Yield to maturity 12.89%
Effective annual yield 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 $120.00
Par value (redemption value) $100

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 Examples

Coupon rate (annual) 9.00%

Years till maturity 10
Today 6/22/2020 Maturity 6/23/2030

Yield to maturity 6.28%

2 years later
New yield 3.78%
Par value (redemption value) $100
Coupon rate (annual) 9.00%
Years till maturity 8
Today 6/23/2022 Maturity 6/23/2030

New Price 135.77

Holding period yield

Bond value $120.00
Par value (redemption value) 135.77
Coupon rate (annual) 9.00%
Years till maturity 2
Today 6/22/2020 Maturity 6/23/2022

Holding period yield 13.44%

5 An EDS Corp. bond carries an 8 percent coupon,

paid semiannually. The par value is $1,000 and the bond
matures in six years. If the bond currently sells for
$911.37, what is its yield to maturity?
What is the effective annual yield?

Settle date 1/1/1997

Mat date 1/1/2003
Rate 8%
Price 91.137
Frequency 2

Yield 10.00%
EAY 10.25%

6 A callable bond pays annual interest of $60,

has a par value of $1,000,
matures in 20 years but is callable in 10 years
at a price of $1,100, and has a value today of $911.90.
The yield to call on this bond is:

Settle date 1/1/1997

Mat date 1/1/2007
Rate 6%
Price 91.19
Frequency 1

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 Examples

Yield 7.27%

7 A coupon bond which pays interest annually,

has a par value of $1,000, matures in 5 years
and has a yield to maturity of 12%.
If the coupon rate is 9%, the value of the bond today
will be:

Settle date 1/1/1997

Mat date 1/1/2002
Rate 9%
Yield 12%
Frequency 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?

Original Present
Settle date 1/1/1997 7/1/1999
Mat date 1/1/2007 1/1/2007
Rate 8.25% 8%
Yield 8.23% 9%
Frequency 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% 3 million face value
5-year 9% s.a. bonds 33 million face value

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?

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 Examples

Item Cash LoansTreas note IBM bond 6-mo CD 5-yr bond Equity
Face value 2 13 20 6 3 33
Settle date 1/1/1997 1/1/1997 1/1/1997 1/1/1997 1/1/1997 1/1/1997
Mat date 1/1/1997 4/1/1997 1/1/2001 1/1/2004 7/1/1997 1/1/2002
Rate - 10.25% 6.00% 7.90% 4.00% 9.00%
Yield - 10.25% 6.35% 8.23% 4.00% 9.00%
Frequency - 2 2 2 2 2

Price 100 100.00 98.78 98.27 100.00 100.00 46.52

Value 2 13.00 19.76 5.90 3.00 33.00 4.65
Modified durati 0 0.2 3.5 5.3 0.5 4.0

If rates rose by 0.10% value would change by 0.028661 million

and this is 0.62% of 4.65 net worth

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 Examples

e bonds make
t bond price?

make semiannual

en years to maturity. The bonds make

eld on the bonds?

don't change. If you actually

s of $1,200. The bond has

decide to sell. What

he YTM when you

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 Examples

nnual-pay bond at issuance

. How much has the bond's

ole shareholder, has been

on in order to evaluate its

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 Examples

Assets Liab.+Eq. Net

40.65 40.65
2.54 3.25 -0.71

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