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    Bond Valuation

    Uploaded by

    Matthew Ryan
    This document provides examples of zero-coupon bond and coupon bond valuation using yield to maturity. For zero-coupon bonds, the bond price is calculated given the face value, maturity, and YTM. For coupon bonds, the bond price is shown at different YTMs relative to the coupon rate. Additional sections show how duration is calculated from cash flows, and how a bond can be valued using yields from the yield curve rather than a single YTM.

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    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd

    Bond Valuation

    Uploaded by

    Matthew Ryan
    38 views17 pages
    This document provides examples of zero-coupon bond and coupon bond valuation using yield to maturity. For zero-coupon bonds, the bond price is calculated given the face value, maturity, and YTM. For coupon bonds, the bond price is shown at different YTMs relative to the coupon rate. Additional sections show how duration is calculated from cash flows, and how a bond can be valued using yields from the yield curve rather than a single YTM.

    Original Description:

    Bond valuation exercise

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    This document provides examples of zero-coupon bond and coupon bond valuation using yield to maturity. For zero-coupon bonds, the bond price is calculated given the face value, maturity, and YTM. For coupon bonds, the bond price is shown at different YTMs relative to the coupon rate. Additional sections show how duration is calculated from cash flows, and how a bond can be valued using yields from the yield curve rather than a single YTM.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
    38 views17 pages

    Bond Valuation

    Uploaded by

    Matthew Ryan
    This document provides examples of zero-coupon bond and coupon bond valuation using yield to maturity. For zero-coupon bonds, the bond price is calculated given the face value, maturity, and YTM. For coupon bonds, the bond price is shown at different YTMs relative to the coupon rate. Additional sections show how duration is calculated from cash flows, and how a bond can be valued using yields from the yield curve rather than a single YTM.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
    of 17

    Zero-coupon bond valuation

    Example 1
    Face value $100.00
    Bond's price $98.00
    Maturity in years 3

    YTM 0.68%

    Example 2
    Face value $100.00
    YTM 2%
    Maturity in years 5

    Bond's price $90.57


    Zero-coupon bond valuation

    Example 1
    Face value $100.00
    Bond's price $98.00
    Maturity in years 3

    YTM 0.68%

    Example 2
    Face value $100.00
    YTM 2%
    Maturity in years 5

    Bond's price $90.57


    Coupon bond valuation

    Coupon rate 5%
    Coupon frequency 2
    Face value 1000
    Maturity in years 5

    YTM Bond's price


    5% $1,000.00 at par
    8% $878.34 premium
    3% $1,092.22 discount
    Coupon bond valuation

    Coupon rate 5%
    Coupon frequency 2
    Face value 1000
    Maturity in years 5

    YTM Bond's price


    5% $1,000.00
    8% $878.34
    3% $1,092.22

    If the YTM is = the coupon rate, the bond's price is = to the face value
    If the YTM is higher than the coupon rate, the bond's price is less than the face value
    If the YTM is lower than the coupon rate, the bond's price is higher than the face valu
    an the face value
    han the face value
    Inputs
    Face value $1,000.00
    Coupon rate 7%
    Maturity 5

    YTM 5%
    Price $1,086.59 PREMIUM - coupon payments higher than th

    1 2 3 4 5
    Coupon rate 7% 7% 7% 7% 7%
    Discount rate YTM) 5% 5% 5% 5% 5%

    8%
    7%
    6%
    5%
    4% Coupon rate
    3% Discount rate YTM)
    2%
    1%
    0%
    1 2 3 4 5
    ayments higher than the discount market rate

    Coupon rate
    Discount rate YTM)
    Price calculations (various bonds)
    Inputs Bond maturity 1 2
    Coupon rate 5% Face value $1,000 $1,000
    YTM 9% Price $963 $930
    Face value $1,000
    Face value as % of Face value 0.00% 0.00%
    Bond Price as % of Face value -3.67% -7.04%

    0.00%
    1 2 3 4 5 6
    -5.00%

    -10.00%

    -15.00%

    -20.00%

    -25.00%

    -30.00%

    -35.00%

    -40.00%
    3 4 5 6 7 8 9 10 11
    $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000
    $899 $870 $844 $821 $799 $779 $760 $743 $728

    0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%


    -10.13% -12.96% -15.56% -17.94% -20.13% -22.14% -23.98% -25.67% -27.22%

    5 6 7 8 9 10 11 12 13 14

    Face
    %o
    valu

    Bon
    %o
    valu
    12 13 14
    $1,000 $1,000 $1,000
    $714 $701 $689

    0.00% 0.00% 0.00%


    -28.64% -29.95% -31.14%

    13 14

    Face value as
    % of Face
    value

    Bond Price as
    % of Face
    value
    Calculating duration - annual compounding

    Inputs
    Maturity in years 4
    Compounding Annual
    Current date 1/1/2016
    Maturity date 1/1/2020
    Coupon 6%
    YTM 5%
    Face value $1,000.00

    Duration calculation
    Bond's price today $1,035.46

    Year (T) Cash flows PV of the CF


    1 $60.00 $57.14
    2 $60.00 $54.42
    3 $60.00 $51.83
    4 $1,060.00 $872.06
    $1,035.46

    With excel

    Check duration
    Rate change
    New bond price PV function
    % change

    Duration prediction -Duration * annual rate change / (1+YTM annual


    Weight of the PV of
    Weight of the PV of the CF in the price
    the CF in the price * T
    0.0552 0.0552
    0.0526 0.1051
    0.0501 0.1502
    0.8422 3.3688
    3.6793

    * annual rate change / (1+YTM annual)


    Calculating duration - annual compounding

    Inputs
    Maturity in years 4
    Compounding Annual
    Current date 1/1/2016
    Maturity date 1/1/2020
    Coupon 6%
    YTM 5%
    Face value $1,000.00

    Duration calculation
    Bond's price today $1,035.46

    Year (T) Cash flows PV of the CF


    1 $60.00 $57.14
    2 $60.00 $54.42
    3 $60.00 $51.83
    4 $1,060.00 $872.06
    $1,035.46

    With excel 3.6793

    Check duration
    Rate change 0.50%
    New bond price $1,017.53 PV function
    % change -1.73%

    Duration prediction -1.75% -Duration * annual rate change / (1+YTM annual


    Weight of the PV of
    Weight of the PV of the CF in the price
    the CF in the price * T
    0.0552 0.0552
    0.0526 0.1051
    0.0501 0.1502
    0.8422 3.3688
    3.6793

    * annual rate change / (1+YTM annual)


    Bond valuation with the yield curve

    Face value $1,000.00


    Maturity 3
    Coupon rate 4.00%
    1-y rate 3.50%
    2-y rate 4.00%
    3-y rate 4.50%

    Year Cash flows PV of the CFs


    1 $40.00
    2 $40.00
    3 $1,040.00
    Total

    YTM
    Bond valuation with the yield curve

    Face value $1,000.00


    Maturity 3
    Coupon rate 4.00%
    1-y rate 3.50%
    2-y rate 4.00%
    3-y rate 4.50%

    Year Cash flows PV of the CFs


    1 $40.00 $38.65
    2 $40.00 $36.98
    3 $1,040.00 $911.35
    Total $986.98

    YTM 4.47%

    The YTM is a rate between the rates from the yield curve
    The YTM is typically very close to the rate for the principal repayment because this is the most s
    The lower the coupon, the closer the YTM to the rate of the principal CF
    nt because this is the most significant CF

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