C C C C C C C C

1 2 … T-1 T T+1 … ∞

C C C C C

1 2 … T-1 T

C C C C C+M

1 2 … T-1 T

C C C C C C C+M

1 2 3 4 … T-1 T

C C C C C C+M
Jun-15 Dec-15 Jun-16 Dec-16 … Dec-21
C C C C C+M

1 2 … n(T-1) nT
Compute the price of a 9% semiannual coupon bond with 10 years to maturity and a face value of USD 1,000.
Assume that the market required yield (YTM) is 6%.
Bond data
Face value 1,000
Coupon rate 0.09
Frequency (number of coupon payments per year) 2
Coupon payment 45
Market required yield 0.06
Settlment date 1/26/2016
Maturity date 1/26/2026
Time to maturity (years) 10

We wish to find the price for that bond. We will use three different methods that will give us the same price.

1) We find the price using the bond pricing formula (see above).

Sum of discounted coupons 669.49

Discounted principal 553.68
Price 1,223.16

2) We find the price with the Excel Price function.

Price 1,223.16

PRICE function

The PRICE function returns the price per $100 face value of a security that pays periodic interest.
PRICE(settlement, maturity, rate, yld, redemption, frequency, [basis])
The PRICE function syntax has the following arguments:
Settlement Required. The security's settlement date. The security settlement date is the date after the issue date when the s
Maturity Required. The security's maturity date. The maturity date is the date when the security expires.
Rate Required. The security's annual coupon rate.
Yld Required. The security's annual yield.
Redemption Required. The security's redemption value per $100 face value.
Frequency Required. The number of coupon payments per year. For annual payments, frequency = 1; for semiannual, freque
Basis Optional. The type of day count basis to use.

Important: Dates should be entered by using the DATE function, or as results of other formulas or functions.
For example, use DATE(2008,5,23) for the 23rd day of May, 2008. Problems can occur if dates are entered as text.
*Important: If the face value is 1,000, the price function should be multiplied by 10.

The bond pricing formula may be hard to remember, while the Excel Price formula requires you to know the exact settlement
Fortunately, there is another way to calculate the bond price, in case you do not want to use the bond pricing formula or cann
3) We find the price by writing down all the discounted cash flows of the bond in each period when the coupons are paid.

We proceed in steps.
i) First, write down the number of periods where cash flows are paid from now to maturity.
For a ten-year bond with two coupon payments per year (semiannual frequency), we have 20 periods (20 semesters).

ii) Then, write down the cash flows paid by the bond in each period.
Remember to include the principal amount in the cash flow of the last period.

iii) Enter the frequency (n=2) and the market required yield (0.06).

iv) Take the sum of all discounted cash flows to get the price

Periods (semesters=2*Y) 1 2 3
Cash flows 45 45 45
Frequency 2 2 2
Market required yield 0.06 0.06 0.06
Discounted cash flows 43.69 42.42 41.18
Price 1223.16

Two things to notice:

a) The three methods yield exactly the same bond price.
b) With semiannual coupon payments, the bond price is higher than in the case of annual frequency: the higher the frequency
 Basis
0 or
omitted
1
2
3
he issue date when the security is traded to the buyer. 4

1; for semiannual, frequency = 2; for quarterly, frequency = 4.

ered as text.

ow the exact settlement and maturity dates of the bond.

d pricing formula or cannot use the Excel Price function.
he coupons are paid.

(20 semesters).

4 5 6 7 8 9 10 11 12
45 45 45 45 45 45 45 45 45
2 2 2 2 2 2 2 2 2
0.06 0.06 0.06 0.06 0.06 0.06 0.06 0.06 0.06
39.98 38.82 37.69 36.59 35.52 34.49 33.48 32.51 31.56

the higher the frequency of compounding (n), the higher the bond price.
Day count
basis
US (NASD)
30/360
Actual/
actual
Actual/360
Actual/365
European
30/360
 13 14 15 16 17 18 19 20
45 45 45 45 45 45 45 1045
2 2 2 2 2 2 2 2
0.06 0.06 0.06 0.06 0.06 0.06 0.06 0.06
30.64 29.75 28.88 28.04 27.23 26.43 25.66 578.59
Compute the price of a 9% annual coupon bond with 10 years to maturity and a face value of USD 1,000.
Assume that the market required yield (YTM) is 6%.
Bond data
Face value 1,000
Coupon rate 0.09
Frequency (number of coupon payments per year) 1
Coupon payment
Market required yield 0.06
Settlment date 1/26/2016
Maturity date 1/26/2026
Time to maturity (years) 10

We wish to find the price for that bond.

We will use three different methods that will give us the same price.

1) We find the price using the bond pricing formula (see above).
You can calculate the first the discounted coupons, then the discounted principal.

1 Discounted coupons
2 Discounted principal
Price

2) We find the price using the Excel Price function PRICE function

Price The PRICE function returns the price per $100 fa

PRICE(settlement, maturity, rate, yld, redempti
The PRICE function syntax has the following argu
Settlement Required. The security's settlemen
Maturity Required. The security's maturity dat
Rate Required. The security's annual coupon r
Yld Required. The security's annual yield.
Redemption Required. The security's redempti
Frequency Required. The number of coupon p
Basis Optional. The type of day count basis to

Important: Dates should be entered by using the

For example, use DATE(2008,5,23) for the 23rd d
Important: If the face value is 1,000, the price fu

The bond pricing formula may be hard to remember, while the Excel Price formula requires you to know the exact settlement
Fortunately, there is another way to calculate the bond price, in case you do not want to use the bond pricing formula or cann

3) We find the price by writing down all the discounted cash flows of the bond in each period when the coupons are paid.
We proceed in steps.
i) Write down the number of periods where cash flows are paid from now to maturity.
For a ten-year bond with one coupon payment per year (annual frequency), we have 10 periods (ten years).

ii) Write down the cash flows paid by the bond in each period.
Remember to add the principal amount to the last coupon payment.

iii) Enter the frequency (n=1) and the market required yield (0.06)

iv) Take the sum of all discounted cash flows to get the price

Periods (years)
Cash flows
Frequency
Market required yield
Discounted cash flows
Price

With the three methods, we always reach the same conclusion: the bond price is 1220.8 dollars.
urns the price per $100 face value of a security that pays periodic interest.
urity, rate, yld, redemption, frequency, [basis])
tax has the following arguments:
The security's settlement date. The security settlement date is the date after the issue date when the security is traded to the buyer.
he security's maturity date. The maturity date is the date when the security expires.
ecurity's annual coupon rate.
urity's annual yield.
d. The security's redemption value per $100 face value.
The number of coupon payments per year. For annual payments, frequency = 1; for semiannual, frequency = 2; for quarterly, frequency =
ype of day count basis to use.

d be entered by using the DATE function, or as results of other formulas or functions.

(2008,5,23) for the 23rd day of May, 2008. Problems can occur if dates are entered as text.
alue is 1,000, the price function should be multiplied by 10.

ow the exact settlement and maturity dates of the bond.

d pricing formula or cannot use the Excel Price function.

the coupons are paid.

 Day count
Basis
0 or basis
US (NASD)
omitted 30/360
Actual/
1 actual
2 Actual/360
3 Actual/365
European
curity is traded to the buyer. 4 30/360

ncy = 2; for quarterly, frequency = 4.

Finding the yield-to-
maturity

Coupon rate 7% 7%
Frequency 2 2
Face value $1,000 $1,000
Coupon payment $35 $35
Maturity (years) 15 15
Price $655.9 $655.9

Yield 10% 12%

PV $769.4 $655.9

Nominal YTM 12.0%

Effective YTM 12.36%
Compute the YTM of a 8% semiannual coupon bond with 20 years to maturity and a face value of USD 1,000.
Assume that the market price of the bond is 900.
Bond data
Face value 1,000
Coupon rate 0.08
Frequency (number of c 2
Coupon payment 40
Price 900.00
Settlment date 1/26/2016
Maturity date 1/26/2036
Time to maturity (years) 20

We wish to find the semiannual, annual and effective annual YTM for that bond.
We will use three different methods that will give us the same price.

1) Trial and error: this method consists in making an initial guess for the semiannual YTM to estimate the price of the bond.
Once you have the estimated bond price, you find with Goal Seek the semiannual YTM which equates the estimated bond price to the actual one (900).

Let us proceed in steps.

i) Write down the periods when the bond pays cash flows. In this case we have a 20-year bond paying coupons twice a year (semiannual frequency), therefore we hav
ii) Write down the cash flows paid by the bond in each of the 40 periods. Remember that at maturity you are getting the face value as well.
iii) Make an initial guess for the semiannual YTM. For example, assume it is 3% (but you could of course choose a different value).
iv) Transform the semiannual YTM into annual and effective annual YTM.
iv) In each period, use the guessed semiannual YTM to discount the cash flows.
v) Calculate the present value of the bond.
vi) Use goal seek to find the semiannual YTM which equates the estimated bond price to the actual one.

Periods (semesters) 1 2 3 4 5 6 7
Cash flows 40 40 40 40 40 40 40
Semiannual YTM 0.045
Annual YTM 0.091 = semiannual * 2
 Effective YTM 0.093
Discounted cash flows 38.26 36.60 35.00 33.48 32.03 30.63 29.30
Estimated price 900.00
Actual price 900
Gap 0.00

2) Now let us find the YTM using the Excel function YIELD function
YIELD(settlement, maturity, rate, pr, redemption, frequency, [basis])
[cv The YIELD function syntax has the following arguments:
Semiannual YTM 4.55% Settlement Required. The security's settlement date. The security settlement date is the date after the
Annual 9.09% Maturity Required. The security's maturity date. The maturity date is the date when the security expir
Effective YTM 9.30% Rate Required. The security's annual coupon rate.
Pr Required. The security's price per $100 face value.
Redemption Required. The security's redemption value per $100 face value.
Frequency Required. The number of coupon payments per year. For annual payments, frequency = 1;
Basis Optional. The type of day count basis to use.
Important: Dates should be entered by using the DATE function, or as results of other formulas or functi
Important: Price and face value should be entered as percentages of the face value.

In case you do not have the settlement and maturity dates and you prefer not to use Goal Seek, there is another method to calculate the YTM. It consists in using the I

3) Use the Excel IRR function (Internal rate of return).

i) write down the initial period where you buy the bond (period 0) and all the periods when the bond pays cash flows.

Periods (years) 0 1 2 3 4 5 6 7
Cash flows -900.00 40 40 40 40 40 40 40
Semiannual YTM 4.55%
 Annual YTM 9.09%
Effective annual YTM 9.30%

Remember that the IRR makes the net present value of an investment equal to zero.
In case of a bond investment, the IRR is called YTM.
actual one (900).

al frequency), therefore we have 40 periods of coupon payment (40 semesters).

8 9 10 11 12 13 14 15 16 17 18 19
40 40 40 40 40 40 40 40 40 40 40 40
 28.03 26.81 25.64 24.53 23.46 22.44 21.46 20.53 19.64 18.78 17.97 17.18

ement date is the date after the issue date when the security is traded to the buyer.
he date when the security expires.

nnual payments, frequency = 1; for semiannual, frequency = 2; for quarterly, frequency = 4.

sults of other formulas or functions. For example, use DATE(2008,5,23) for the 23rd day of May, 2008. Problems can occur if dates are entered as text.
e face value.

he YTM. It consists in using the IRR excel function.

8 9 10 11 12 13 14 15 16 17 18 19
40 40 40 40 40 40 40 40 40 40 40 40
20 21 22 23 24 25 26 27 28 29 30 31
40 40 40 40 40 40 40 40 40 40 40 40
16.44 15.72 15.04 14.38 13.76 13.16 12.59 12.04 11.52 11.02 10.54 10.08

Day count
Basis
0 or basis
US (NASD)
omitted 30/360
Actual/
1 actual
2 Actual/360
3 Actual/365
European
4 30/360

20 21 22 23 24 25 26 27 28 29 30 31
40 40 40 40 40 40 40 40 40 40 40 40
32 33 34 35 36 37 38 39 40
40 40 40 40 40 40 40 40 1040
9.64 9.22 8.82 8.44 8.07 7.72 7.38 7.06 175.61

32 33 34 35 36 37 38 39 40
40 40 40 40 40 40 40 40 1040
Compute the YTM of a 8% annual coupon bond with 20 years to maturity and a face value of USD 1,000.
Assume that the market price of the bond is 900.
Bond data
Face value 1,000
Coupon rate 0.08
Frequency (number of 1
Coupon payment 80
Price 900
Settlment date 1/26/2016
Maturity date 1/26/2036
Time to maturity (year 20

We wish to find the YTM for that bond.

We will use three different methods that will give us the same price.

1) Trial and error: this method consists in making an initial guess for the YTM to estimate the price of the bond.
Once you have the estimated bond price, you find with Goal Seek the YTM which equates the estimated bond price to the act

Let us proceed in steps.

i) Write down the periods when the bond pays cash flows. In this case we have a 20-year bond paying coupons once a year (an
ii) Write down the cash flows paid by the bond in each of the 20 periods. Remember that at maturity you are getting the face v
iii) Make an initial guess for the YTM. For example, assume it is 6% (but you could of course choose a different value).
iv) In each period, use the guessed YTM to discount the cash flows.
v) Calculate the estimated bond price.
vi) Use Excel Goal Seek to find the YTM which equates the estimated bond price to the actual one.

Periods (years) 1 2 3 4 5
Cash flows 80 80 80 80 80
YTM 9.10%
Discounted cash flows 73.32 67.21 61.60 56.46 51.75
Estimated price 900.00
Actual price 900
Gap 0.00

YTM 0.091

2) Use the Excel YIELD function

YIELD(settlement, maturity, rate, pr, redemption, frequency, [basis])

YTM 9.10%
YIELD function
YIELD(settlement, maturity, rate, pr, redemption, frequency, [basis])
The YIELD function syntax has the following arguments:
Settlement Required. The security's settlement date. The security settlement date is the date after the issue date when the s
Maturity Required. The security's maturity date. The maturity date is the date when the security expires.
Rate Required. The security's annual coupon rate.
Pr Required. The security's price per $100 face value.
Redemption Required. The security's redemption value per $100 face value.
Frequency Required. The number of coupon payments per year. For annual payments, frequency = 1; for semiannual, freque
Basis Optional. The type of day count basis to use.
Important: Dates should be entered by using the DATE function, or as results of other formulas or functions. For example, use
Important: Price and face value should be entered as percentages of the face value.

Finally, in case you do not have the settlement and maturity dates and you prefer not to use Goal Seek, there is another meth

3) Use the Excel IRR function (Internal rate of return).

i) write down the initial period where you buy the bond (period 0) and all the periods when the bond pays cash flows.
ii) Use the IRR function.

Periods (years) 0 1 2 3 4 5
Cash flows -900.00 80 80 80 80 80
IRR 9.10%

Remember that the IRR makes the net present value of an investment equal to zero.
In case of a bond investment, the IRR is called YTM.

YTM 9.10%
of the bond.
ated bond price to the actual one (900).

ng coupons once a year (annual frequency), therefore we have 20 periods.

y you are getting the face value as well.
a different value).

6 7 8 9 10 11 12 13 14 15
80 80 80 80 80 80 80 80 80 80

47.43 43.47 39.85 36.52 33.47 30.68 28.12 25.77 23.62 21.65
 the issue date when the security is traded to the buyer.

= 1; for semiannual, frequency = 2; for quarterly, frequency = 4.

unctions. For example, use DATE(2008,5,23) for the 23rd day of May, 2008. Problems can occur if dates are entered as text.

ek, there is another method to calculate the YTM. It consists in using the IRR excel function.

d pays cash flows.

6 7 8 9 10 11 12 13 14 15
80 80 80 80 80 80 80 80 80 80
 16 17 18 19 20
80 80 80 80 1080

19.85 18.19 16.67 15.28 189.08

 Day count
Basis
0 or basis
US (NASD)
omitted 30/360
Actual/
1 actual
Actual/
2 360
Actual/
3 365
European
4 30/360

tered as text.

16 17 18 19 20
80 80 80 80 1080
 Finding the yield-to-call (YTC)

Coupon rate 10%

Frequency 2
Years to maturity 20
Face value $1,000
Market price $848
Years to call 6
Price of callable bond in 6 years $1,025 price of the callable bond
Number of coupon payments 12
Semiannual coupon payments $50
Semiannual YTC 7.06%
YTC 14.12%
Effective YTC 14.62%
PV $848.00 use the formula P = (C/(Y/N))* (1-(1/ (1+y/n)) ^T) + M/((1+y/n)^T)
Gap $0.00

Alternative method to find YTC

Periods 0 1 2 3 4 5
-$848.00 $50 $50 $50 $50 $50

Semiannual YTC 7.06%

YTC 14.12%
Effective YTC
 6 7 8 9 10 11 12
$50 $50 $50 $50 $50 $50 $1,075
 Finding the bond price

Semiannual Annual Zero

Maturity (years) 20 20 20
Coupon rate 9% 9%
Frequency of payments 2 1
Face value $1,000 $1,000 $1,000
Coupon payments
YTM 6% 6% 6%

Semiannual frequency Annual frequency

Sum of discounted coupon payments
Discounted principal amount
Price
nual frequency Zero-coupon bond
 Finding the Bond Price

YTM Coupon rate Frequency Coupon payments Maturity Maturity value

6% 9% 2 20 $ 1,000
7% 9% 2 20 $ 1,000
8% 9% 2 20 $ 1,000
9% 9% 2 20 $ 1,000
10% 9% 2 20 $ 1,000
Discounted coupons Discounted principal Price Kind of bond
 Bond 1 Bond 3 Bond 5
Settlement 12/7/2015 12/7/2015 12/7/2015
Maturity 12/7/2035 12/7/2035 12/7/2035
Coupon rate 8% 8% 8%
Face Value $1,000 $1,000 $1,000
Frequency of payments 2 2 2
Coupon payment
Time to maturity 20 20 20
Market required yield 6.0% 8.0% 10.0%

Time to maturity Bond price Bond price Bond price

20
19
18
17
16
15
14
13
12
11
10
9
8
7
6
5
4
3
2
1
0

Premium Par Discount

0 1 2 3 4
0.0 0 0 0 0

Err:523
Err:523
5 6 7 8 9 10 11 12 13 14
0 0 0 0 0 0 0 0 0 0
15 16 17 18 19 20 21 22 23 24
0 0 0 0 0 0 0 0 0 0
25 26 27 28 29 30 31 32 33 34
0 0 0 0 0 0 0 0 0 0
35 36 37 38 39 40
0 0 0 0 0 $1,000
Coupon rate 8% 8% 8%
Face Value $1,000 $1,000 $1,000
Frequency of 2 2 2
Coupon payment
Market requir 6% 8% 10%

pon paymentsed face value f bond price pon paymentsed face value f bond price pon paymentsed face value f bond price
Time to matur
20
19
18
17
16
15
14
13
12
11
10
9
8
7
6
5
4
3
2
1
0

Premium Premium Premium Par Par Par Discount Discount Discount

Today it is February 9, 2016.
You buy on the secondary market the following bond (with pays semiannual coupons).
Find the accrued interest, dirty price and clean price of the bond.
The bond pays semiannual coupons on September 27 and March 27.
Find the accrued interest, durty and clean prices.

Face value 100

Coupon 6.75%
Issue date 9/27/2004
Maturity date 9/27/2034
Frequency 2
YTM 5.15%
Accrued int. calc. ACT/365

9/27/2015 2/9/2016 3/27/2016 9/27/2016 3/27/2017 9/27/2017

Last coupon Trade date
Cash flows
Discounted cash flows
Dirty price
AI
Clean price
3/27/2018 9/27/2018 3/27/2019 9/27/2019 3/27/2020 9/27/2020 3/27/2021 9/27/2021
3/27/2022 9/27/2022 3/27/2023 9/27/2023 3/27/2024 9/27/2024 3/27/2025 9/27/2025
3/27/2026 9/27/2026 3/27/2027 9/27/2027 3/27/2028 9/27/2028 3/27/2029 9/27/2029
3/27/2030 9/27/2030 3/27/2031 9/27/2031 3/27/2032 9/27/2032 3/27/2033 9/27/2033
3/27/2034 9/27/2034
Consider the following three-bond portfolio.
Each bond pays coupons with semiannual frequency.
Find the semiannual, annual and effective YTM of the portfolio.

Bond Coupon Rate Maturity (yrs) Par Value($)

A 7.0% 5 $10,000,000
B 10.5% 7 $20,000,000
C 6.0% 3 $30,000,000
Total market value

Semiannual YTM YTM

Period when cash

flow is received Bond A Bond B Bond C
1
2
3
4
5
6
7
8
9
10
11
12
13
14
Total present value of the portfolio cash flows

YTM on the bond portfolio 0.00%

Semiannual Coupon Payment Price Value ($) YTM Bond Type
6.0%
10.5%
8.5%

Target cell
Effective YTM Market value-PV

Present value of
Portfolio Period Cash Flow
Suppose that today you buy a coupon bond which matures in 20 years. You plan to sell this bond three years later.
Compute the total return for your bond investment.
DATA
Maturity (years)
Coupon rate
Yield-to-maturity
Annual reinvestment rate
Face value
Yield for 17-year bond at the end of the investment horizon
Investment horizon

Step 1
Calculate the value of the coupon payments plus the interest-on-interest at the end of the horizon.

Note: Coupon payments plus the interest-on-interest at the end of investment horizon (see below the formula)
C=semiannual coupon payment
t=investment horizon (yrs)*2
rr=semiannual reinvestment rate

Coupon rate Maturity Par value ($) Semiannual coupon payments

8% 20 $1,000

Annual reivestment rate Investment horizon (years) Coupon payment +interest-on-interest

6% 3

Step 2
Find the projected sale price of the bond at the end of the investment horizon.
Find the total future value of the bond.
Find also the semiannual, annual and effective rates return of the bond investment.

Coupon rate Periods left to maturity (years*2) Par value ($) Semiannual coupon payment
8% 17 $1,000 $0
l this bond three years later.

20
8%
10%
6%
$1,000
7%
3

see below the formula)

Semiannual coupon payments Purchase price ($) YTM

10%

Coupon payment +interest-on-interest

miannual coupon payment Annual end-of-horizon yield Horizon price ($)

$0 7.0%
Total future value Semiannual rate of return Annual rate of return
Annual rate of return Effective annual rate of return