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Debt Markets
Debt Products - Tradeable Products
Bonds, Debentures
Point of Issuer
Point of Investor
Types of bonds - Straight Bond, Convertible bond
Callable
Puttable

Convertibility
Zero Coupon
Price and valuation
What is Valuation ?
Price of a bond - using PV , NPV , normal
FACE VALUE, COUPON RATE, COUPON FREQUENCY, TENOR OR MATU
Current Yield
YTM, IRR, Expected Rate of Ret, Market Int rate
FACE VALUE, COUPON RATE, COUPON FREQUENCY, TENOR OR MATU
RATE , IRR
Yield vs Price
Price vs Term

Discounted, Premium , At Par

Relationship between coupon amount and the Yield = Price of a bond
If the coupon rate > yield = Bond will be trading at a premium,
If the copon rate = Yield - Bond will be at Par
If the coupon rate< yield - Bond will be trading at a discount
Value of zero coupon - semi annual , annual
Value of a zero coupon bond - is it based on Annual coupon or semi a
Yield to call
Price relationship with change increase in Yield
 Deals with Tradeable produ ts
Debt prodcuts like Term Loans, Overdraft, Business Loan, Loan agains
Bond Features - Face value, coupon rate, tenor or maturity (dates), ot

Called by the issuer before maturity. Adv to Issuer - When the market
Redeembed by the Holder or buyer of the bond before maturity. Adv
Adv to the bond buyer : If the market int rate > coupon rate, the bond
% of conversion (ratio of conversio), time of conversion to be specifie
Always issued at a discount , redeemed at Par
Price is always given by the market, Valuation is an estimation or fore
Present value of expected futures benefits that the asset is going to g
At what rate , we are discounting or expected yield
NCY, TENOR OR MATURITY, YIELD (DISCONTTED RATE)
Annual Amount / Price of the bond 0.0889
InputS?
NCY, TENOR OR MATURITY, PRICE OF THE BOND

Yield and Price they move in opposite direction

Price of the bond always decreases as the time to maturity is approac
Time Decay

ield = Price of a bond - whether it is at a premium, or at or at discount

at a premium,
t a discount
Future value vs Present value
ual coupon or semi annual
YTM measured for the call period
oan, Loan against assets - We are not dealing
turity (dates), other features

When the market return < copon rate

e maturity. Adv to the bond holder
n rate, the bond buyer will redeem before maturity
on to be specified at the time of bond issue
Face value and term of the bond should be specified at the time of iss
timation or forecast using certain inputs with some assumptions
set is going to generate - Discounted value of futures cash flows that the ass

turity is approach , provided all other variables, yield or discounting rate rem

t discount
ed at the time of issue of bond
mptions
h flows that the asset is going to generate

iscounting rate remains constant

Understand basics of Debt Products

Debt is a liability and contractually payable as per the contrac

Debt Capital has some advantages
Int on debt has tax incentives

What are the debt produts you are aware of?

Simple loan, term loan,
Savings intruments like Fixed Deposit in bank or post office
Bonds, Debentures,
Hybrid instruments which have got debt characteristics
Govt Securities like Treasury bonds, Money Market Instrumen
Call money, Notice money , Repos,

We will be focussing on debt instrument which are tradeable

Bonds, Debentures
T Bill, Commercial Paper, Repos, tradeable
The above instruments can be bought and sold in the seconda
They are issued in the Primary Market

Bonds or Debentures ?
In india , we have classification , like debentures
Debentures are nothing but bonds, issued by corporations or
Bonds are issued by Govt
Bonds or Debentures are one and the same.

What are bonds?

Bonds are debt insturments,issued by govts, companies, mun

do bonds carry risk?

Yes they carry risk in terms whether the coupons or the princ

What are the basic characteristics of a straight bond or coupo

Requirements of a coupon bond

Face value 100, 2000,

Coupon Rate Percentage of face value
Coupon Frequency Annual, Semi annual, Qu
Maturity or Term of the bond

Example of annual coupon paying bond

Face value 1000
Coupon Rate 8%
Coupon Frequency annual
Tenor or Maturity 5Years
Redemption value 1000at par

Example of a semi annual coupon paying bond

Face value 1000
Coupon Rate 8%
Coupon Frequency 2Semi annual
Tenor or Maturity 5Years
Redemption value 1000at par

What are other types of bonds ?

1/ Straight Bond
2/ Zero coupon bond
3/ Convertible bond
4/ Floating rate Note
5/ Callable bond
6/ Puttable bond
7/Perpetual bond

2/ Zero coupon bond

A bond that pays no coupon issued at a discount but redeeme
Example
A zero coupon bond current price is 9785.00 to be redeemed

Term CFs 91 day T bill issued at Rs 23,890 ,

0 -9785
 1 0
2 0
3 10,000

3/
Convertible bond is a bond issued with a convertibility option
or full in to equity shares at a ratio decided at the inception o
Convertibility option rests with the bond investors if the optio

Example
A bond with a face value of Rs 1000 issued with 60% converti
Currently stock is trading at Rs 200 per share
After 3 years, the bond investor will exercise his righ to conve
the market price of the share gives more value than the 60%

4/Floating rate note

The coupon will be paid not on a fixed basis but with referenc
some index or inflation rates
Mostly floating rate notes are paid with reference to LIBOR, M

A bond with a floating rate coupon will look like this

Face value 1000
Coupon Rate LIBOR +0.5%
Coupon Frequency Annual
Note : LIBOR will be based on previous LIBOR quoted in the m
5/ Callable bond
A bond issued with a call option by the bond issuer
with an option to recall the bond earlier before maturity main

A bond issued with call feature

Currently Face value 1000
Coupon rate 8% Annual
Call feature after 3 years
After 3 years, market int rate has fallen to 6%
The bond issuer or the company would like to recall the bond

7/ Puttable bond
A bond issued with a put option, meaning the bond holder or
redeem or surrender the bond earlier before maturity
Why ?
If the interest rate in the market has increased drastically, the
this bond with pays less coupon , thereby he can invest in a n
er the contract

r post office

teristics
rket Instruments like T Bill, Commercial Paper,

are tradeable in natures

in the secondary market

orporations or companies
mpanies, municipalities etc

ns or the principal are repaid in time as per contract

bond or coupon paying bond ?

100,000

mi annual, Quarterly, Monthly,

in years

It’s a called fixed Income Security

Term CFs
1 80
2 80
3 80
4 80
5 1080

It’s a called fixed Income Security

Term CFs
 1 40
emi annual 2 40
3 40
4 40
5 40
6 40
7 40
8 40
9 40
10 1040

nt but redeemed at par (face value)

o be redeemed after 3 years (10,000)

at Rs 23,890 , Redeemed at Rs 25,000 after 91 days

rtibility option, to convert either part of the face value
he inception of the bond
ors if the option is given

60% convertibility in to 3 equity shares after 3 years.

s righ to convert in to 3 shares only if

than the 60% of Face value , ie Rs 600

t with reference to some int rates or

nce to LIBOR, MIBOR some int rates

uoted in the market

maturity mainly when the market int rates go down

ecall the bond and then issue a bond with a lower coupon

ond holder or investor will have the right to

aturity

drastically, the bond investor can surrender

n invest in a new bond that pays higher coupon
A bond with a face value 1000 and with a coupon 10% annual
redeemed at 10% premium
calculate the value or the price of the bond
tenor 5 years and the yield is 6.25%

Years Future Present Value

1 100 0.941176471
2 100 0.885813149
3 100 0.833706493
4 100 0.784664935
5 1200 0.738508174

FACE VALUE 1000

COUPON RATE 8%
REDEMPTION VALUE 10%
TENOR 5
REQUIRED RATE 12%
REDEMPTION VALUE 1100
PRICE OF THE BOND ?
FOR SEMIN ANNUAL
GIVEN
COUPON AMOUNT 40
NO OF PAYMENTS NPER 10
REQ RATE 0.06
PRICE OF THE BOND ₹908.64

PRICING OF A BOND

FACE VALUE 1000

COUPON RATE 10%
COUPON AMOUNT 100
COUPON FREQUENCY SEMIN ANNUAL
TERM 10 Years
REQUIRED YIELD 11% ANNUAL

ANNUAL YIELD 11% 9%

SEMIN ANNUAL YIELD 5.5% 4.50%
NO OF PERIODS 20 20
SEMI ANNUAL COUPO 50 50

₹940.25 ₹1,065.04

NOTE : - Ve sign is incorporated for present value

For Semi Annual Coupon,

Multiply the tenor by 2
Divide Annual coupon amount by 2
nd with a coupon 10% annual yield
Tenor
of the bond

Using NPV
PV of Value of Payment
94.117647058824 using PV functi
88.581314878893
83.370649297781
78.466493456735
886.20980845254
1230.7459131448

Using NPV function

40
SEMI ANNUAL 40
PREMIUM 40
YEARS 40
PA 40
40
40
40
40
DIVIDE BY 2 1140 ₹908.64
MULITPLY BY 2
DIVIDE BY 2

10% When the yield decreases, the bond price inceases

0.05000
20
50

₹1,000.00
 6.25%
5

Using NPV formula

₹1,230.75

₹1,230.75
d price inceases
Valuation and pricing of a bond

Calculate the value of the below bond

Face value 1000
Coupon Rate 8%
Coupon frequency 1annual
Tenor 5Years
Redemption value 1000
Discount rate
Yield to Maturity 9%
IRR
Expected Rate of return
Market Int rate

Calculate the price of the below bond

Face value 100

Coupon rate 6%
Coupon frequency 2semi annual
Tenor 3Years
YTM 8%
Redeption value 100
Calculate the price of the below bond using PV method
Face value 1000
Coupon rate 8%
Coupon frequency 12monthly
Tenor 3Years
YTM 8%
Redemption value 1000
Price ₹1,000.00 =-PV(D34/D32,D33*D32,D

When YTM is more than Coupon rate, the bond will be

When YTM is Less than the coupon rate, the bond will
YTM= Coupon rate, Bond will be at par

Analyze using data table

Cacluate the price of the below zero coupon bond on s

Reedmeption value 1000

Term 5
Yield to Maturity 8%

Using PV function ₹675.56

 Term CF PV of CFs
1 80 73.3945 =I6/(1+$E$12)^H6
2 80 67.3344 =I7/(1+$E$12)^H7
3 80 61.77468 =I8/(1+$E$12)^H8
4 80 56.67402 =I9/(1+$E$12)^H9
5 1080 701.9259 =I10/(1+$E$12)^H10
Present value 961.1035 =SUM(J6:J10)
NPV method ₹961.10 =NPV(E12,I6:I10)
Using PV function ₹961.10 =-PV(E12,D9,I6,D10,

Term CFS PV CFS

1 3 2.884615 =I19/(1+$D$23/$D$
2 3 2.773669 =I20/(1+$D$23/$D$
i annual 3 3 2.666989 =I21/(1+$D$23/$D$
4 3 2.564413 =I22/(1+$D$23/$D$
5 3 2.465781 =I23/(1+$D$23/$D$
6 103 81.4024 =I24/(1+$D$23/$D$
 PV of cFS 94.75786 =SUM(J19:J24)
NPV ₹94.76 =NPV(D23/D21,I19:I
PV ₹94.76 =-PV(D23/D21,D22*

bond using PV method

V(D34/D32,D33*D32,D30*D31/D32,D35,0)

rate, the bond will be at a discount

on rate, the bond will be at a premium

Yield
1000.00 4% 5% 6% 7% 8%
3%
4%
5%
6%
7%
8%
 9%
10%
11%
12%
13%
14%
15%

ero coupon bond on semi annual basis

Years
I6/(1+$E$12)^H6
I7/(1+$E$12)^H7
I8/(1+$E$12)^H8
I9/(1+$E$12)^H9
I10/(1+$E$12)^H10
SUM(J6:J10)
NPV(E12,I6:I10)
-PV(E12,D9,I6,D10,0)

I19/(1+$D$23/$D$21)^H19 ₹2.88 =-PV($D$23/$D$21,H19,,I19,0)

I20/(1+$D$23/$D$21)^H20 ₹2.77 =-PV($D$23/$D$21,H20,,I20,0)
I21/(1+$D$23/$D$21)^H21 ₹2.67 =-PV($D$23/$D$21,H21,,I21,0)
I22/(1+$D$23/$D$21)^H22 ₹2.56 =-PV($D$23/$D$21,H22,,I22,0)
I23/(1+$D$23/$D$21)^H23 ₹2.47 =-PV($D$23/$D$21,H23,,I23,0)
I24/(1+$D$23/$D$21)^H24 ₹81.40 =-PV($D$23/$D$21,H24,,I24,0)
SUM(J19:J24)
NPV(D23/D21,I19:I24)
-PV(D23/D21,D22*D21,D19*D20/D21,D24,0)

9% 10%
$21,H19,,I19,0)
$21,H20,,I20,0)
$21,H21,,I21,0)
$21,H22,,I22,0)
$21,H23,,I23,0)
$21,H24,,I24,0)
1/ Valuation of a Semi Annual Coupon Bond

Bond Face value 1000

Coupon Rate 8%
Coupon Frequency 2 Semi annual
Maturity. / Term 5 Years
Redemption Value 1000
YTM 9%

Term 1 2 3 4
CFs 40 40 40 40

PV of CFs 38.278 36.629 35.0518642 33.542

Using Discount Cash flows ₹960.436 =SUM(C16:L16)

Using PV Function ₹960.436 =-PV(E10/E7,E8*E
Using NPV function ₹960.436 =NPV(E10/E7,C13

2/ Pricing a Zero Coupon Bond

Face value / Redemption Value 1000

Term of the bond 5
YTM 8%
Price of a zero copuon bond (Semi annual basis)
Price of a zero copuon bond (annual basis)
emi annual

5 6 7 8 9 10
40 40 40 40 40 1040

32.098 30.716 29.393 28.127 26.916 669.68

SUM(C16:L16)
-PV(E10/E7,E8*E7,E5*E6/E7,E9,0)
NPV(E10/E7,C13:L13)

Years
675.56
680.58
 PRICE FUNTION

Sl No Argument description
 1 Face Valje
Settlement date
2 Maturity date
3 Percent Annual coupon
4 Percent yield
5 Redemption value per $100
6 Frequency
7 30/360 basis

Price of the bond $100 par value of a bond

7. Basis : This is optional integer

argument which specify the financial
day counting basis
ON

Data
 10,000
12/15/2017
11/15/2020
6.50
7.20
100
2
0

62.2581158481503
6225.81158481503
Face Value 100,000
Redemption Value % of 100 100
Actual Coupon Rate 7%
Required Return 8%
Settlement Date 12/15/2017
Maturity Date 9/15/2020
Years to Maturity 3
Payment Frequency 2
Basis 0

Price using Price function 97.5574144593083

Value of the bond 97557.4144593083
 12/15/2017
9/15/2020

97.5574144593083
975.574144593083
6.2
Bright Computers Ltd is planning to issue a debenture series w
for a term of 10 years with the following copon rates. (Annual

Years
1 -4 years
5-8 years
9-10 years

The company propose to price the issue in a such a way that

return is received by the investors.
The redeemable price of the debenture will be at 10% Premiu
. What should be the issue price of debenture ?

Solution
Coupon Int for the first 4 years : 8%
Coupon Int for the next four years : 9%
Cooupon for last two years 13%

Redemption Value
Maturity

Years
1
2
3
4
5
6
7
 8
9
10
10
 Computers Ltd is planning to issue a debenture series with a face value of R
erm of 10 years with the following copon rates. (Annual Coupon Payment)

Coupon Rates
8%
9%
13%

ompany propose to price the issue in a such a way that a yield of 16% comp
is received by the investors.
deemable price of the debenture will be at 10% Premium
should be the issue price of debenture ?

on Int for the first 4 years : 8% 80.00

on Int for the next four years : 9% 90.00
pon for last two years 13% 130.00

mption Value 1100

10 Years

Cash Outflow PV@16%

80.00 0.86206896552
80.00 0.74316290131
80.00 0.64065767354
80.00 0.55229109788
90.00 0.47611301541
90.00 0.41044225467
90.00 0.35382952989
 90.00 0.3050254568
130.00 0.26295298
130.00 0.22668360345
1100.0 0.22668360345
Issue Price of Debenture is
 a face value of Rs 1000 each
upon Payment)

ield of 16% compounded rateof

Discounted Value
68.9655172
59.4530321
51.2526139
44.1832878
42.8501714
36.9398029
31.8446577
27.4522911
34.1838874
29.4688684
249.351964
675.946094
Example

Sl. No. Argument Description Data

1 Settlement Date 5/25/2018
2 Maturity Date 11/15/2020
3 Percent Annual Coupon 6.50
4 Percent Yield 7.20
5 Redemption Value 100
6 Frequency 2
7 30/360 Basis 0

Price of the Bond per

$100 face value of a -68.92570966
security that pays a
periodic interest
Frequency Value Day Count Type Value
Annually 1 US 30/360 0
Semiannually 2 Actual/actual 1
Quarterly 4 Actual/360 2
Monthly 12 Actual/365 3
European 30/36 4
Note : Semi Annual Basis

Zero Coupon Bond Exercise

($ in millions)

Bond Price
Face Value (FV) $1,000
Number of Years to Maturity 10 Years
Compounding Frequency 2
Yield-to-Maturity (YTM) 3.0%

Price of Bond (PV) $742.47

Annual Basis

Face value 1,000

Time to Maturity 10
Yield to Maturity Int Rate 3.00%
Price of the bond 744.09
USING PV FUNCTION 744.094

Formula
Price of Bond (PV) = FV / (1 + r) ^ t
Where:
PV = Present Value
FV = Future Value
r = Yield-to-Maturity (YTM)
t = Number of Compounding Periods

Formula
Yield-to-Maturity (YTM) = (FV / PV) ^ (1 / t) – 1

Yield-to-Maturity (YTM)
Face Value (FV) $1,000
Number of Years to Maturity 10 Years
Compounding Frequency 2
Price of Bond (PV) $742.47

Yield-to-Maturity (YTM) 3.000%

Note : Semi Annual Basis 0

ytm 0
ANNUAL BASIS
Face Value (FV) $1,000
Number of Years to Maturity 10 Years
Compounding Frequency 1
Price of Bond (PV) $742.47

Yield-to-Maturity (YTM) 3.0225%

Face Value (FV) = $1,000

Number of Years to Maturity = 10 Years

Compounding Frequency = 2 (Semi-Annual)

Yield-to-Maturity (YTM) = 3.0%

Given those assumptions, the que

If we input the provided figures in

Present Value (PV) = $1,000 / (1 + 3.0% / 2)

PV = $742.47
Face Value (FV) = $1,000

Number of Years to Maturity = 10 Years

Compounding Frequency = 2 (Semi-Annual)

Price of Bond (PV) = $742.47

We can enter the inputs into the YTM fo

Semi-Annual Yield-to-Maturity (YTM) = ($1,000 / $7

Annual Yield-to-Maturity (YTM) = 1.5% * 2 = 3.0%

rity = 10 Years

= 2 (Semi-Annual)

= 3.0%

ptions, the question is, “What price are you willing to pay for the bo

vided figures into the present value (PV) formula, we get

00 / (1 + 3.0% / 2) ^ (10 * 2)
 Years

mi-Annual)

nto the YTM formula since we already have the necessar

YTM) = ($1,000 / $742.47) ^ (1 / 10 * 2) – 1 = 1.5%

= 1.5% * 2 = 3.0%
ing to pay for the bond?”

rmula, we get the following:

e the necessary inputs:
Current Yield

Example
A par bond which pays 8% coupon bond annully maturing in 3

Bond Face value

Coupon Rate
Coupon Frequency
Redemption value
Maturity
Current Price of the bnd
Term CFs
1 8
2 8
3 108

What is the current yield ?

Current yield is considers the premium/discount in bond pric

but ignores the capital gain/loss and reinvestment rate; and t

Yield-to-maturity
Yield-to-maturity (YTM) is the most widely used measure is si
YTM considers the premium/discount in bond price and capit

What it does is: (a) amortizes the capital gain/loss at redempti

(b) averages the returns for all periods in a complex way; and

YTM in bond market is also called internal rate of return (IRR)

Spot rate (also known as “zero rate”) is the true return on inv

It considers premium/discount in bond price, capital gain/loss

Consider the below example

Year Zero Rates Z Cash flow

1 7.750% 8
2 8.000% 8
3 8.250% 108
Price

First, the bond price is determined, not by demand-supply fo

It should be noted that the demand-supply forces do have a
The demand-supply for money determines the zero rates, wh
Second, in a coupon bond (or annuity), there is no single ret
In the above example, the return is 7.75% for one year for a fi
and 8.25% for three years for a final amount of 108. The inter
which will be automatically reinvested at the same 8% for on
Similarly, the 3Y zero rate of 8.25% more years; and in the sec
the return is the same 8.25%, which is reinvested for one mor
implies that in the first year, the return is 8.25%, which is rein

What is YTM ?

Term Cash flow

0 -99.424558144
1 8
2 8
3 108

YTM 8.22%
pon bond annully maturing in 3 years

100
8%
1
1000
3
103

Annual Coupon Amount / CMP of the bond

7.767%

premium/discount in bond price

ss and reinvestment rate; and therefore cannot be a true return.
most widely used measure is simply called “yield”. However, it is still not a tru
scount in bond price and capital gain/loss at redemption and even handles t

he capital gain/loss at redemption over the bond’s life and adds it to the curr
periods in a complex way; and (c) assumes that interim cash flows are reinve

ed internal rate of return (IRR) in corporate finance and effective yield (EY) in

rate”) is the true return on investment,

in bond price, capital gain/loss at redemption and reinvestment of interim in

Discounted Value
7.4245939675174
6.85871056241427
85.1412536140534
99.4245581439851

ined, not by demand-supply for bond, but by term structure of zero rates.
mand-supply forces do have a play, but that is demand-supply for money, n
determines the zero rates, which in turn determine the bond price.
annuity), there is no single return measure but multiple of them.
 rn is 7.75% for one year for a final amount of 8; 8% for two years for a final a
final amount of 108. The interpretation of 2Y zero rate of 8% means this: yo
nvested at the same 8% for one more year.
25% more years; and in the second year,
which is reinvested for one more year at the same rate
he return is 8.25%, which is reinvested at the same rate for two
P of the bond

eturn.
er, it is still not a true return measure.
nd even handles the reinvestment in a rough way.

adds it to the current yield;

sh flows are reinvested at the same average return

ffective yield (EY) in accounting/tax jargon.

tment of interim income.

ure of zero rates.

upply for money, not for bond.
ond price.
f them.
o years for a final amount of 8;
8% means this: you earn 8% for one year,
Bond Price = PV -1,009.36

FV = Face Value $1,000.00

PMT = Coupon PMT $50.00

Years To Maturity 1

n = assumed to be semi-annual = 2

Total Number of Periods 2

YTM/n 4.50%

YTM 9.00%

Effective Annual Yield 9.2025%

Note

YTM Calculations

Semi Annual Coupon Multiply by 2

Convert the Semi Annual Yield to effective

=RATE(C7,C4,C2,C3)

0.0805

9.20%
4.50%
FACE VALUE 1000.00
COUPON RATE 11% 11%
Settlement Perio 1-Jan-18
Maturity Period 1-Dec-20
Price of the Bond 970.15
Redmemption Value 10% Premium 110
Coupon Frequency Semi Annual
Calculate YTM Using Yield Function

YTM 0.15145 =YIELD(E8,E9,F7

YTM 15.145%
 0.15145

=YIELD(E8,E9,F7,E10/10,F11,2,0)
Let us take the example of a 10-year coupon paying a bond that pays a coupon
rate of 5%. Calculate the current yield of the bond in the following three cases:

Coupon Rate 6%
Par Value $1,000

Annual Coupon Payment is calculated using the formula given below

Annual Coupon Payment = Coupon Rate * Par Value

Annual Coupon Payment $60

1. Bond is trading at a discounted price of $990.

Current Market Price of Bond $990

Current Yield of a Bond can be calculated using the formula given below
Current Yield = Annual Coupon Payment / Current Market Price of Bond

Current Yield 6.06%

2. Bond is trading at par.

Current Market Price of Bond $1,000

Current Yield of a Bond can be calculated using the formula given below
Current Yield = Annual Coupon Payment / Current Market Price of Bond

Current Yield 6.00%

3. Bond is trading at a premium price of $1,010.

Current Market Price of Bond $1,010

Current Yield of a Bond can be calculated using the formula given below
Current Yield = Annual Coupon Payment / Current Market Price of Bond

Current Yield 5.94%

5% Coupon Bond

Date Year Cash Flow

20-Feb-09 0 -75
20-Feb-10 1 5
20-Feb-11 2 5
20-Feb-12 3 5
20-Feb-13 4 5
20-Feb-14 5 105

Yield Calculation using XI 11.915%

Zero Coupon Bond

Date Cash Flow
20-Feb-09 -75
20-Feb-10 0
20-Feb-11 0
20-Feb-12 0
20-Feb-13 0
20-Feb-14 100

Yield of a zero coupon bo 5.919%

Dated Functions Built in Microsoft Excel

Settlement date: 01/01/2017

1/1/2017
Maturity date: 6/30/2019
6/30/2019
Rate of interest: 10% 10%
Price per $100 FV: 101
Redemption value: 100
Payment terms: Quarterly 4
YIELD
0.09545052
9.55%

FACE VALUE 1000

COUPON RATE 0.11 0.11
Settlement Perio 1/1/2018
Maturity Period 12/1/2020
Price of the Bond 970.15
Redmemption Value 10% Premium 110
Coupon Frequency Semi Annual
Calculate YTM Using Yield Function 0.151448
15.14%

Discounted Securities Yield and Price Calculations Used In M

YIELDDISC Function

Settlement da 1-Jan-17
Maturity date 30-Jun-17
Price per $10 97
Redemption V 100
Yielddisc 6.271%=YIELDDISC(C55,C56,C57,C58,1)

Price Discount Function

To Calculate the Price of a discounted Security

Settlement Da 1-Apr-17
Maturity Date 31-Mar-21
Rate of Disco 0.025
Redemption V 100
90
 20-Feb-09 0Use zero
20-Feb-10 5
20-Feb-11 5
20-Feb-12 5
20-Feb-13 5
20-Feb-14 105
PRICE 75.00Price using XNPV
ons Used In Money Markets
 0.0622012

C57,C58,1)
Plot the price–yield curve for the following annual co
(a) coupon 5%, maturity 3 years; (b) coupon 10%, ma

Assume FACE Value =Redemption Value

Coupon Rate
Coupon Frequency
Maturity

Yield
Price

Yield ₹95.97
0.000%
0.250%
0.500%
0.750%
1.000%
1.250%
1.500%
1.750%
2.000%
2.250%
2.500%
2.750%
3.000%
3.250%
3.500%
3.750%
4.000%
4.250%
4.500%
4.750%
5.000%
5.250%
5.500%
5.750%
6.000%
6.250%
6.500%
6.750%
7.000%
7.250%
7.500%
7.750%
8.000%
8.250%
8.500%
8.750%
9.000%
 9.250%
9.500%
9.750%
10.000%
10.250%
10.500%
10.750%
11.000%
11.250%
11.500%
11.750%
12.000%
12.250%
12.500%
12.750%
13.000%
13.250%
13.500%
13.750%
14.000%
14.250%
14.500%
14.750%
15.000%
15.250%
15.500%
15.750%
16.000%
16.250%
16.500%
16.750%
17.000%
17.250%
17.500%
17.750%
18.000%
18.250%
18.500%
18.750%
19.000%
19.250%
19.500%
19.750%
20.000%
20.250%
20.500%
20.750%
21.000%
21.250%
21.500%
21.750%
22.000%
22.250%
22.500%
22.750%
23.000%
23.250%
23.500%
23.750%
24.000%
24.250%
24.500%
24.750%
25.000%
25.250%
25.500%
25.750%
26.000%
26.250%
26.500%
26.750%
27.000%
27.250%
27.500%
27.750%
28.000%
28.250%
28.500%
28.750%
29.000%
29.250%
29.500%
29.750%
30.000%
30.250%
30.500%
30.750%
31.000%
31.250%
31.500%
31.750%
32.000%
32.250%
32.500%
32.750%
33.000%
33.250%
33.500%
33.750%
34.000%
34.250%
34.500%
34.750%
35.000%
35.250%
35.500%
35.750%
36.000%
36.250%
36.500%
36.750%
37.000%
37.250%
37.500%
37.750%
38.000%
38.250%
38.500%
38.750%
39.000%
39.250%
39.500%
39.750%
40.000%
40.250%
40.500%
40.750%
41.000%
41.250%
41.500%
41.750%
42.000%
42.250%
42.500%
42.750%
43.000%
43.250%
43.500%
43.750%
44.000%
44.250%
44.500%
44.750%
45.000%
45.250%
45.500%
45.750%
46.000%
46.250%
46.500%
46.750%
47.000%
47.250%
47.500%
47.750%
48.000%
48.250%
48.500%
48.750%
49.000%
49.250%
49.500%
49.750%
50.000%
50.250%
50.500%
50.750%
51.000%
51.250%
51.500%
51.750%
52.000%
52.250%
52.500%
52.750%
53.000%
53.250%
53.500%
53.750%
54.000%
54.250%
54.500%
54.750%
55.000%
55.250%
55.500%
55.750%
56.000%
56.250%
56.500%
56.750%
57.000%
57.250%
57.500%
57.750%
58.000%
58.250%
58.500%
58.750%
59.000%
59.250%
59.500%
59.750%
60.000%
60.250%
60.500%
60.750%
61.000%
61.250%
61.500%
61.750%
62.000%
62.250%
62.500%
62.750%
63.000%
63.250%
63.500%
63.750%
64.000%
64.250%
64.500%
64.750%
65.000%
65.250%
65.500%
65.750%
66.000%
66.250%
66.500%
66.750%
67.000%
67.250%
67.500%
67.750%
68.000%
68.250%
68.500%
68.750%
69.000%
69.250%
69.500%
69.750%
70.000%
70.250%
70.500%
70.750%
71.000%
71.250%
71.500%
71.750%
72.000%
72.250%
72.500%
72.750%
73.000%
73.250%
73.500%
73.750%
74.000%
74.250%
74.500%
74.750%
75.000%
75.250%
75.500%
75.750%
76.000%
76.250%
76.500%
76.750%
77.000%
77.250%
77.500%
77.750%
78.000%
78.250%
78.500%
78.750%
79.000%
79.250%
79.500%
79.750%
80.000%
80.250%
80.500%
80.750%
81.000%
81.250%
81.500%
81.750%
82.000%
82.250%
82.500%
82.750%
83.000%
83.250%
83.500%
83.750%
84.000%
84.250%
84.500%
84.750%
85.000%
85.250%
85.500%
85.750%
86.000%
86.250%
86.500%
86.750%
87.000%
87.250%
87.500%
87.750%
88.000%
88.250%
88.500%
88.750%
89.000%
89.250%
89.500%
89.750%
90.000%
90.250%
90.500%
90.750%
91.000%
91.250%
91.500%
91.750%
92.000%
92.250%
92.500%
92.750%
93.000%
93.250%
93.500%
 93.750%
94.000%
94.250%
94.500%
94.750%
95.000%
95.250%
95.500%
95.750%
96.000%
96.250%
96.500%
96.750%
97.000%
97.250%
97.500%
97.750%
98.000%
98.250%
98.500%
98.750%
99.000%
99.250%
99.500%
99.750%
100.000%
e following annual coupon bonds:
; (b) coupon 10%, maturity 3 years; (c) coupon 10%, maturity 5 years

Bond 1 Bond 2
on Value 100 100
5% 10%
2 2
3 3

6.50% 6.50%
₹95.97 ₹109.40

₹109.40 ₹123.16
160 Price vs Yield
158.34811 Column F Column

156.71722 180

155.10704 160

153.51727 140

151.94761 120

150.39779 100

148.86752 80

147.35652 60

145.86452 40

144.39125 20

0
0.000% 20.000% 40.000% 60.000%
 40

20

142.93644
0
0.000% 20.000% 40.000% 60.000%

141.49983
140.08117
138.6802
137.29667
135.93034
134.58097
133.24831
131.93214
130.63222
129.34833
128.08025
126.82774
125.59061
124.36863
123.16159
121.96928
120.79151
119.62808
118.47877
117.34341
116.22179
115.11374
114.01905
112.93756
111.86908
110.81343
109.77043
108.73993
107.72173
106.71569
105.72163
104.73939
103.76881
102.80974
101.86201
100.92548
100
99.085413
98.181577
97.288348
96.405585
95.533147
94.670896
93.818698
92.976418
92.143925
91.321089
90.507782
89.703879
88.909254
88.123785
87.347353
86.579837
85.821122
85.071091
84.329631
83.59663
82.871977
82.155563
81.447282
80.747027
80.054694
79.37018
78.693384
78.024207
77.362549
76.708314
76.061406
75.421732
74.789197
74.16371
73.545182
72.933523
72.328645
71.730462
71.138888
70.55384
69.975234
69.402989
68.837025
68.277261
67.723619
67.176023
66.634395
66.098662
65.568748
65.044581
64.526088
64.0132
63.505845
63.003954
62.50746
62.016296
61.530394
61.04969
60.57412
60.10362
59.638126
59.177578
58.721914
58.271075
57.825
57.383632
56.946913
56.514785
56.087194
55.664082
55.245396
54.831082
54.421087
54.015358
53.613843
53.216492
52.823254
52.434079
52.048919
51.667725
51.29045
50.917045
50.547466
50.181665
49.819599
49.461222
49.10649
48.75536
48.407789
48.063735
47.723156
47.386011
47.052259
46.72186
46.394775
46.070964
45.75039
45.433014
45.118798
44.807705
44.4997
44.194745
43.892806
43.593847
43.297833
43.004731
42.714506
42.427125
42.142555
41.860764
41.58172
41.305391
41.031745
40.760753
40.492383
40.226605
39.96339
39.702709
39.444532
39.188831
38.935577
38.684744
38.436304
38.190228
37.946492
37.705067
37.465929
37.229051
36.994407
36.761974
36.531725
36.303637
36.077686
35.853846
35.632095
35.41241
35.194768
34.979145
34.765519
34.553869
34.344172
34.136407
33.930552
33.726587
 33.52449
33.324241
33.12582
32.929207
32.734381
32.541324
32.350016
32.160438
31.972571
31.786396
31.601896
31.419052
31.237845
31.058259
30.880276
30.703878
30.529049
30.355772
30.184029
30.013805
29.845083
29.677847
29.512082
29.347771
29.184899
29.023452
28.863412
28.704767
28.547501
28.391599
28.237047
28.08383
27.931936
27.781349
27.632056
27.484044
27.337299
27.191808
27.047558
26.904535
26.762727
26.622122
26.482707
26.344469
26.207397
26.071478
25.9367
25.803052
25.670522
25.539099
25.40877
25.279526
25.151354
25.024245
24.898186
24.773168
24.649179
24.526209
24.404249
24.283287
24.163314
24.044319
23.926293
23.809226
23.693108
23.57793
23.463682
23.350355
23.23794
23.126427
23.015808
22.906074
22.797216
22.689225
22.582092
22.47581
22.370369
22.265762
 22.16198
22.059014
21.956858
21.855503
21.754941
21.655164
21.556165
21.457936
21.36047
21.263759
21.167796
21.072573
20.978084
20.88432
20.791277
20.698945
20.607319
20.516391
20.426156
20.336605
20.247734
20.159534
20.072001
19.985126
19.898905
19.813331
19.728398
19.644099
19.560429
19.477381
19.394951
19.313131
19.231917
19.151302
19.071281
18.991848
18.912999
18.834726
18.757026
18.679892
18.60332
18.527304
18.451839
18.376919
18.302541
18.228698
18.155386
18.0826
18.010336
17.938587
17.86735
17.79662
17.726393
17.656663
17.587426
17.518678
17.450414
17.382629
17.315321
17.248483
17.182112
17.116204
17.050754
16.985759
16.921214
16.857115
16.793458
16.73024
16.667456
16.605102
16.543175
16.481671
16.420586
16.359916
16.299658
16.239808
16.180363
16.121318
16.062671
16.004417
15.946554
15.889077
15.831985
15.775272
15.718936
15.662974
15.607382
15.552158
15.497297
15.442797
15.388655
15.334867
15.281431
15.228343
15.175601
15.123201
15.071141
15.019418
14.968028
14.916969
14.866238
14.815833
14.76575
14.715987
14.666542
14.61741
14.568591
14.52008
14.471876
14.423976
14.376378
14.329078
14.282075
14.235365
14.188947
14.142818
14.096976
14.051418
14.006142
13.961145
13.916425
13.871981
13.827809
13.783908
13.740274
13.696907
13.653804
13.610962
13.56838
13.526055
maturity 5 years

Bond 3
100
12%
2
5

6.50%
₹123.16

Price vs Yield Chart

Column F Column G Column H

.000% 40.000% 60.000% 80.000% 100.000% 120.000%

.000% 40.000% 60.000% 80.000% 100.000% 120.000%
Face Value 1000
Term 20 Years
Coupon Frequency Semi Annual
Coupon Rate 10%
Coupon Amount 100

Yield Price
0.045 ₹1,720.32
0.050 ₹1,627.57
0.055 ₹1,541.76
0.060 ₹1,462.30
0.065 ₹1,388.65
0.070 ₹1,320.33
0.075 ₹1,256.89
0.080 ₹1,197.93
0.085 ₹1,143.08
0.090 ₹1,092.01
0.095 ₹1,044.41
0.100 ₹1,000.00
0.105 ₹958.53
0.110 ₹919.77
0.115 ₹883.50
0.120 ₹849.54
0.125 ₹817.70
0.130 ₹787.82
0.135 ₹759.75
0.140 ₹733.37
0.145 ₹708.53
0.150 ₹685.14
0.155 ₹663.08
0.160 ₹642.26
0.165 ₹622.59
0.170 ₹603.99
0.175 ₹586.39
0.180 ₹569.71
0.185 ₹553.89
0.190 ₹538.87
0.195 ₹524.61
0.200 ₹511.05
40

50

Price vs Yield
₹2,000.00

₹1,800.00

₹1,600.00

₹1,400.00

₹1,200.00

₹1,000.00

₹800.00

₹600.00

₹400.00

₹200.00

₹0.00
0.020 0.040 0.060 0.080 0.100 0.120 0.140 0.160 0.
1 -90
2 0
3 0
4 0
5 0
6 100
2%
0.140 0.160 0.180
Assumptions
(1) The investor holds the bond to maturity,
(2) there is no default by the issuer, and
(3) the coupon interest payments are reinvested at th

Tenor of the bond

Coupon Frequency
Coupon Rate
Assume Face value
Purchase Price
Reinvestment Rate
 1 8
2 8
3 8
4 8
5 8
6 8
7 8
8 8
9 8
10 8
ds the bond to maturity,
lt by the issuer, and
est payments are reinvested at that same rate of interest.

10 Years
Annual
8%
100
85.503075
10.40%
 ₹129.97068
100
₹229.97068 FV TOTAL RETURN
85.503075PV PURCHASE PRICE
REALIZED RETURN 10.40%USE RATE FUNCTION
 1000
10%
100
12%

₹927.90
CTION
Zero rates Cont. Comp Rates
MaturitZero rates
0.5 5%
1 5.80%
1.5 6.40%
2 6.80%

Suppose that a 2-year Treasury bond with a principal of

Calculate Value of the Treasury bond

Term CFs Zero rates PV of CFS

0.5 3 5% 2.9259
1 3 5.80% 2.8309
1.5 3 6.40% 2.7254
2 103 6.80% 89.9028
98.38506277

How do you find yield to maturity ? Single yield that can

Assume some yield, solve through goal see

Term CFs Zero rates PV of CFS
0.5 3 6.762% 2.9003
1 3 6.762% 2.8038
1.5 3 6.762% 2.7106
2 103 6.762% 89.9711
98.385837
with a principal of $100 provides coupons at the rate of 6% per annu

ingle yield that can give the same price of the bond

6.76203%
6% per annum semiannually.