FV 10000

Coupon Rate 8.00%

Maturity (Yrs) 6 2/23/2027
Annual YTM 8.00%
Price of the Bond 10000.00 Calculated

FV 1000
Coupon Rate 8%
Maturity (Yrs) 6
Price of the Bond 1000.00
YTM 8.000% Calculated

Duration of a Bond
Years Cash Flows (Coupons+ FV) Present Value (Weights)
1 1 800 740.74
2 2 800 685.87
3 3 800 635.07
4 4 800 588.02
5 5 800 544.47
6 6 10800 6805.83
0 7 0 0.00
0 8 0 0.00
0 9 0 0.00
0 10 0 0.00
0 11 0 0.00
0 12 0 0.00
0 13 0 0.00
0 14 0 0.00
0 15 0 0.00
0 16 0 0.00
Sum 10000.00
Duration of the Bond (Yrs) 5.0 Mcluay Duration
Mod Duration 4.6 Mc duration/ 1+r
In intrest rates (YTM) Decline by 0.5% (50 bps) the change in price of the bond will be approx
New Price

In interest rates (YTM) Increase by 0.5% (50 bps) the change in price of the bond will be approx
New Price
 2/24/2021
3% 0.05486760922513

New YTM Year of change

10% 0
Price http://cbonds.com/emissions/issue/498399

Input
Output

WA Sum (PXW)/Sum W

Weighted Avg PV Compounding Cash flow

740.7 ₹ 0.00 ₹ 1,170.47 ₹ 1,170.47
1371.7 ₹ 0.00 ₹ 1,064.06 ₹ 1,064.06
1905.2 ₹ 0.00 ₹ 967.33 ₹ 967.33
2352.1 ₹ 0.00 ₹ 879.39 ₹ 879.39
2722.3 ₹ 0.00 ₹ 799.44 ₹ 799.44
40835.0 ₹ 0.00 ₹ 9,811.36 ₹ 9,811.36
0.0 ₹ 0.00 ₹ 0.00 ₹ 0.00
0.0 ₹ 0.00 ₹ 0.00 ₹ 0.00
0.0 ₹ 0.00 ₹ 0.00 ₹ 0.00
0.0 ₹ 0.00 ₹ 0.00 ₹ 0.00
0.0 ₹ 0.00 ₹ 0.00 ₹ 0.00
0.0 ₹ 0.00 ₹ 0.00 ₹ 0.00
0.0 ₹ 0.00 ₹ 0.00 ₹ 0.00
0.0 ₹ 0.00 ₹ 0.00 ₹ 0.00
0.0 ₹ 0.00 ₹ 0.00 ₹ 0.00
0.0 ₹ 0.00 ₹ 0.00 ₹ 0.00
49927.1 ₹ 14,692.05 ₹ 14,692.05
4.9 ₹ -10,004.77 ₹ -10,004.77
4.62287966396119 Duration func ₹ 4.62
0.023114398319806 ₹ 0.00
₹ -10,234.69 10231.1670975964 ₹ 0.00
₹ 0.00
-0.023114398319806 ₹ 0.00
₹ -9,772.32 9768.85601680194 ₹ 0.00

2 3 4 5
8 8 8 8
104.7
 2.58620689655 118.800 1.199025
1.188
1.089954 1.095

sions/issue/498399

Sum (PW)/Sum W P= What you want average

W= Weights

182

Period before change in YTM period after change in YTM

3.99271003707809 4.0
2.99271003707809 3.0
1.99271003707809 2.0
0.992710037078085 1.0
-0.007289962921915 0.0
-1.00728996292191 -1.0
0 5.0
0 5.0
0 5.0
5.0 5.0
5.0 5.0
5.0 5.0
5.0 5.0
5.0 5.0
5.0 5.0
5.0 5.0
₹ -14,685.04 ₹ -1.00

6
108
FV 10000
Coupon Rate 9.95%
Maturity (Yrs) 6 16.03.2026
Annual YTM 7.74%
Price of the Bond 11029.77 Calculated

FV 1000
Coupon Rate 0%
Maturity (Yrs) 6
Price of the Bond 455.60
YTM 13.999% Calculated

Duration of a Bond
Years
1 1
2 2
3 3
4 4
5 5
6 6
0 7
0 8
0 9
0 10
0 11
0 12
0 13
0 14
0 15
0 16
Duration of the Bond (Yrs)
Mod Duration
In intrest rates (YTM) Decline by 0.5% (50 bps) the change in price of the bond will be approx
New Price
In interest rates (YTM) Increase by 0.5% (50 bps) the change in price of the bond will be approx
New Price
Cash Flows (Coupons+ FV) Present Value (Weights)
995 923.52
995 857.17
995 795.60
995 738.44
995 685.39
10995 7029.65
0 0.00
0 0.00
0 0.00
0 0.00
0 0.00
0 0.00
0 0.00
0 0.00
0 0.00
0 0.00
Sum 11029.77
4.9 Mcluay Duration
4.5 Mc duration/ 1+r
0.166666666666667

1
8
 3% 0.05486760922513

New YTM Year of change

7% 0
Price http://cbonds.com/emissions/issue/498399

Input Sum (PW)/Sum W

Output

WA Sum (PXW)/Sum W

Weighted Avg PV Compounding Cash flow Period before ch period after change in YTM
923.5 ₹ 0.00 ₹ 1,291.78 3.85805804339 3.9
1714.3 ₹ 0.00 ₹ 1,207.27 2.85805804339 2.9
2386.8 ₹ 0.00 ₹ 1,128.29 1.85805804339 1.9
2953.8 ₹ 0.00 ₹ 1,054.47 0.85805804339 0.9
3427.0 ₹ 0.00 ₹ 985.49 ₹ 5,667.30 -0.14194195661 -0.1
42177.9 ₹ 0.00 ₹ 10,177.49 ₹ 108.00 -1.14194195661 -1.1
0.0 ₹ 0.00 ₹ 0.00 0 4.9
0.0 ₹ 0.00 ₹ 0.00 0 4.9
0.0 ₹ 0.00 ₹ 0.00 0 4.9
0.0 ₹ 0.00 ₹ 0.00 4.9 4.9
0.0 ₹ 0.00 ₹ 0.00 4.9 4.9
0.0 ₹ 0.00 ₹ 0.00 4.9 4.9
0.0 ₹ 0.00 ₹ 0.00 4.9 4.9
0.0 ₹ 0.00 ₹ 0.00 4.9 4.9
0.0 ₹ 0.00 ₹ 0.00 4.9 4.9
0.0 ₹ 0.00 ₹ 0.00 4.9 4.9
53583.2 ₹ 15,844.79 ₹ 1.13 ₹ -15,843.66
₹ -11,030.55
Duration func
0.02254528515
11278.4567505

-0.0225452851
10781.0958108

2 3 4 5 6
8 8 8 8 108
104.7
 2.58620689655 118.800 1.199025
1.188
1.089954 1.095

P= What you want average

W= Weights

182

r change in YTM

₹ -1.00
In order to calculate price of a bond on date which is not a coupan date,accrued interest has
to be added. Bonds prices are quoted as dirty price which means it includes accrued interest
of days from last coupan to settlement date.Below is the calculator for calculating dirty
price by inputting details in yellow boxes

Inputs
Settlement Date 24-Feb-2021
Maturity Date 7-Oct-2029
Coupon date 7-Oct-2020 Semiannual
Coupon Rate 6.45%
Effective Rate 0.0645
Coupan Amount INR 3.23
YTM 6.1100%
Effective YTM 0.0611
Face Value INR 100.00
Market price INR 102.21 ₹ -102.25
Frequency 2

Periods 8.62
Days from last Coupan Err:502 Err:502 Take NTPC- N6
Days to next coupan 42
Total days in Coupan 182.5
ate,accrued interest has 3.055%
cludes accrued interest
for calculating dirty
3.23 0.1148565903964 3.11514
100.99 3.08% 0.06169

This amount is the accrued interest, w

is paid to the seller of bond for hold
Outputs that bond upto settelment date
PV of Coupans INR 42.73

PV of Face Value INR 59.53

Clean Price INR 102.25

Accrued Interest Err:502

Dirty Price Err:502

YTM 0.029
This price is the sum of pv
coupans, face value and acc
e NTPC- N6 Err:502 interest

YTM (CR- (MP-FV)/N)/(FV+MV)/2

he accrued interest, which
eller of bond for holding
upto settelment date

price is the sum of pv of

s, face value and accrued
interest
 To find out the price senstivity to yield, Inputs are filled in yellow coloured boxes .
Now in Output Boxes (blue coloured boxes) , we can see that duration (wieghted
,Mduration and Rupee duration will be calculated which can be used to forcast the
changes in price of bond due to change in yield.We can verify this by actually
calculating the effect on price due to change in yield which is shown in table 2.

Table 1
Inputs Outputs
Settelment date 24-Feb-2021 24-Feb-2021
Maturity date 7-Oct-2029 7-Oct-2029
Frequency 2 2
Rate 6.45% 0.03225
YTM 6.11% 0.03055
Face Value INR 100.00 INR 100.00 Mc Duration/(1+r)
Amount of Coupan INR 3.23 INR 3.23
coupan numbers 18 18
Pv of coupans INR 44.15
PV of FV INR 58.18 Yield
Price INR 102.33 Price
Outputs
Term to maturity 8.62 change
Duration 7.63 7.407312 7.19405
Modified Duration 7.40 1.0000%
Rupee Duration 0.0757 0.074008
PVBP 0.0008 94.75422 We can change the yield
exactly equal to rupee dur
An increase in a bond’s yie
the price gain associat

PVBT is the interest rate senstivity of bond due to

change in 1 basis point in yield.This means that
change in price due to change in a basis point(.01) is .
3158 rupee.
 Here we can see that change in the price of bond ,due to
change in yield is appproximately similar to rupee duration or
PVBT(in case increase of 1 BPS).And If we calculate the
percentage change in price due to change in yield, it will be
similar to Mduration/PVBT

Table 2
Price senstivity to Yield

When Yield Increases When yield decreases

7.110% 5.110%
INR 95.67 INR 109.57

-6.6601 7.2440

We can change the yield by .01 BPS or 1% and Change in price is not
exactly equal to rupee duration/PVBP because of the impact of convexicity.
An increase in a bond’s yield to maturity results in a smaller price decline than
the price gain associated with a decrease of equal magnitude in yield.
 Gap- Deliberatly maintained by the bank

Positive
Positive
Negative
Negative

Bank A is interested in finding out the impact of interest rate changes on earning and
shareholder value

We start our analysis by first breaking down Bank A’s asset and liabilities into two maturity
and interest rate reset buckets. 6 months and 12 months as shown in Table 2. this means
that all assets that mature or revise their interest rate before six months fall in the 0-6 month
bucket. All assets that mature or revise their interest rate between 6-12 months fall in the 6-
12 month bucket.

Assets (RSA)- Investment in Bonds (Both Floating and Fixed)+ Loans given at variable rates

Assets (Fixed)- Loans which are given at fixed rates

Non Earning
Total Assets

Equity
Liabilities (RSL)- Floating rate bonds issued by banks
Liabilities (Fixed)- FDs
Total Liab

GAP (RSA- RSL)

Base
Assets
Liabilities

Interest Income For full year

Interest Expenses
NII

Case 2- Duration Mismatch

Bank A, has 800 million in Assets funded by 600 million in deposits. The bank’s original capital
is therefore 200 million. The weighted average duration of assets is 6. The weighted average
duration of liabilities is 3. This implies that when interest rates change by a percent or more
in either direction, the value of asset and liabilities will change by the respective duration
(interest rate sensitivity).

The maturity mismatch, implied by duration is approximately 3 years and is not that extreme.
Bank A’s crude capital adequacy ratio (CAR) at 25% is respectable by any regulatory standard.

Let’s assume that because of a drastic event and market linked shock interest rates change
by X% for both assets and liabilities. What is the impact on asset as well as liability values? .

Original Position
Mcluay Duration
YTM
MDuration
Changes in interest Rates

Revised Position
 Interest rate Change Impact on NII

Increases Positive
Decreases Negative
Increases Negative
Decreases Positive

RSA- RSL Positive

Total RSA/RSL

2800 2800
2000
200
5000 2800 28
Positive Gap RSA- RSL
200
1800 1800
3000
5000 1800 18

1000 1000 10

Floating Interest (P.a)- RSA/RSLFixed int P/a Floating rates after change
15% 18% 15%
11% 11% 11%

780
528
252
 Assets Liabilities Equity/ Duration Gap
A 800 600 200
6 3
6% 5%
B 5.7 2.9
C -1.0% -1.0% RBI question
D= B*C -5.7% -2.9%
845.28 617.14 228.14 28.1402
Change In Assets/Liab -45.283 -17.143
Mcluay Duration Gap 6 2.25 3.75
Mod Duration Gap 5.7 2.14 3.52 8
leverage ratio 4 14.0700808625337 28.14016
RBI question
Funds M Duration YTM
ICICI Prudential Long Term Bond Fund  7.6 6.88%
Kotak Bond Fund 5.58 6.54%
Axis Short Term Fund 2.3 6.92%
Aditya Birla Sun Life Liquid Fund  0.11 4.93%

Funds M Duration YTM

ICICI Prudential Long Term Bond Fund  7.6 6.88%
Kotak Bond Fund 5.58 6.54%
Axis Short Term Fund 2.3 6.92%
Aditya Birla Sun Life Liquid Fund  0.11 4.93%
Weights Mc luay duration
10% 0.76 8.12288 0.812288
10% 0.558 5.944932 0.594493
64% 1.47287212149 2.45916 1.574795
16% 0.01755828984 0.115423 0.018424
100%
Mod duration of my portfolio 2.80843041133 Mc duration the por 3

I want to invest for 5 years 100000 Duration of Liab 5

Value of assets = Value of Liab
Duration of a = Duration of Liab
Dispersion of the assets should be higher than the dispersion of Liab
PV of Liab ₹ -72,781.62
PV of Assets ₹ 72,301.00 Assets

Weights
43%
10%
37%
10%
YTM of portfolio
0.00688
0.00654
0.044314
0.007869

6.56%
The Chief Investment Officer (CIO) of an Insurance Company estimates that
there will be annual cash outflow of Rs 40,000 at the end of 60 months from
now.
The CIO wants to immunize the payments by investing in the following 2
Bonds as follows:
Bond A: A zero coupon bond of a face value of Rs 1,000 maturing after 7
years and currently traded at Rs 455.60 11.9%
Bond B: A 12% coupon bearing bond of face value of Rs 1,000 maturing
after 7 years redeemable at par value and currently traded at Rs 980.90. 12.4%

determine:
a. Proportion of Funds to be invested in Bond A and Bond B such that
CIO’s payments are immunized.
b. Whether CIO will still be immunized in subsequent years.
 144000

Rebalance
year 0 Weigtage year 1 Calculate duration of assets ag

Duration of Bond A 6.21666667 43.5% Duration of Bond A

Duration of Bond B 4.31 38% Duration of Bond B
Required t Money Market/Liquid bon 0.00 18% Money Market/Liquid
100% 4.358521
Calculate duration of assets again year 2

6 38.03% sell 5.49% Duration of Bond A 5 32%

4.59 37% sell 0.95% Duration of Bond B 4.03 35%
0.00 25% buy -6.44% Money Market/Liquid 0.00 33%
100% 4 100% 3
Dl 4 3
 year 3

sell 6.5% Duration of Bond A 4 24% sell 8%

sell 2.1% Duration of Bond B 3.40 31% sell 4%
buy -9% 0.00 Money Market/Liquid 0.00 45% buy -12%
100% 2
year 4 year 4.5

Duration of Bond A 3 13% sell -11% Duration of Bond A

Duration of Bond B 2.69 23% sell -8% Duration of Bond B
Money Market/Liquid 0.00 64% buy 19% Money Market/Liquid
100% 1
 year 5

Duration of Bond A 2.5 3% sell -3% Duration of Bond A 3

Duration of Bond B 2.19 19% buy 19% Duration of Bond B 2.69
Money Market/Liquid 0.00 78% Money Market/Liquid 0.00
100% 0.5
 0% sell 0%
0% buy 0%
100%
100% 0
 End of Interest
Interest Income Amortization Carrying Value
Year Payment
0 9,950
1* 550 731 -181 10,131
2 550 745 -195 10,326
3 550 759 -209 10,535
4 550 774 -224 10,759
5 550 791 -241 11,000
6 550
7 550

Sol 1

Sol 2
Sol 3
Purchase Price inclusive of issuance Cost 9950
Face Value 11000
Coupon 5%
Maturity Period 5
EAR 7.3% Calculate

0 -450000
1 0
2 0
3 0
4 0
5 600000
IRR 5.92%

10000.1