FINANCIAL MODELING

AND
FORCASTING

Lesson 4

Bond Valuation
 Learning Outcomes
• Identify how Bond valuation concept can be
used to develop financial models
• Explain how Annual and Effective interest
rates effect bond valuation
• Plan and design Bond valuation models with
annual and semi annual cash flows
• Plan and design Bond valuation models with
dynamic charts
Bond Valuation- Annual Coupon

An annual bond has face value of 1000, makes

an annual coupon payment of 25 per year, has
a discount rate per year of 9%, and has 8 years
to maturity. What is the price of the bond?
 Bond Valuation - Annual Coupon

Inputs

Number of periods to maturity (N) 8

Face Value (M) 1000

Discount rate/period (DR) 0.09

Coupon Payment (INT) 25

Outputs

Bond Price Using Cash flow

Period 0 1 2 3 4 5 6 7 8

Cash flow 0 25 25 25 25 25 25 25 1025

Present Value of Cash Flow 0 23 21 19 18 16 15 14 514

Bond price 640

Bond Price Using the Formula

Bond price 640

Using the PV Function

Bond Price 640

 Annual Percentage Rate
Effective Annual Rate
A bond has a face value of 1,000 , an annual
coupon rate of 5.0% , a yield to maturity of 9.0%,
makes 2 coupon payments per year,
and 8 periods to maturity. What is price of this
bond based on the Annual Percentage Rate (APR)
convention? What is price of this bond based on
the Effective Annual Rate (EAR) convention?
 Annual Percentage Rate

Inputs
Rate Convention 1 = EAR, 0 = APR 0
Annual Coupon Rate (CR) 5%
Yield to Maturity (Annual) (Kd) 9%
Number of Paymants (NOP) 2
Number of Periods to maturity (N) 8
Face Value (M) 1000

Outputs
Discount rate/period (DR) 4.50%
Coupon Payment (INT) 25

Bond Price Using Cash flow

Period 0 1 2 3 4 5
Cash flow 0 25 25 25 25 25
Present Value of Cash Flow 0 24 23 22 21 20
Bond price 868

Bond Price Using the Formula

Bond price 868

Using the PV Function

Bond Price 868
Bond Valuation - Dynamic Chart
If you increased the coupon rate of a bond, what
would happen to its price? If you increased the
yield to maturity of a bond, what would happen
to its price? You can answer these questions and
more by creating a Dynamic Chart using
“spinners”
System of Five Bond Variables
There is a system of five bond variables:
a. Number of Periods to Maturity (N),
b. Face Value (M),
c. Discount Rate / Period (DR),
d. Coupon Payments (CR), and
e. Bond Price (Vb).
Given any four of these variables, the fifth variable
can be found by using Excel functions
• Calculate the Yield to Maturity (YTM) of the
XYZ Corporate bond as at 15th December
2010.
 Bond Yield Calculation

Inputs

Face Value (M) 1000

Bond Price (Po) 1027.42

Coupon Rate (Annual) (CR) 7%

Date of Sale (DOS) 15/12/10

Maturity Date (MD) 15/12/17

Number of Periods to Maturity (NOP) 7

Outputs

Coupon (Cp) 70

Bond Yield Using Cash flow

Year 15/12/10 15/12/11 15/12/12 15/12/13 15/12/14 15/12/15 15/12/16 15/12/17

Period 0 1 2 3 4 5 6 7

Cash flow -1027.42 70 70 70 70 70 70 1070

Bond Yield 6.50%

• You are planning to buy the XYZ Corporation
bond on 15th May 2011 at a market price of
Rs.1050. Calculate the YTM of the bond.
 Bond Yield Calculation

Inputs

Face Value (M) 1000

Bond Price (Po) 1050

Coupon Rate (Annual) (CR) 7%

Date of Sale (DOS) 15/12/10

Maturity Date (MD) 15/12/17

Number of Periods to Maturity (NOP) 7

Outputs

Coupon (Cp) 70

Bond Yield Using Cash flow

Year 15/5/11 15/12/11 15/12/12 15/12/13 15/12/14 15/12/15 15/12/16 15/12/17

Period 1 2 3 4 5 6 7

Cash flow -1050 70 70 70 70 70 70 1070

Bond Yield using XIRR 6.58%

• ABC Corporation issues a bond at the same
time as XYZ Corporation. The only difference
between the two bonds is that ABC’s interest
payment is semiannual. It pays interest 15th
June and 15th December. Calculate the YTM of
the bond.
 Bond Yield Calculation - Semiannual Interest

Inputs
Face Value (M) 1000
Bond Price (Po) -1027.42
Coupon Rate (Annual) (CR) 7%
Number of Payments (NOP) 2
Date of Sale (DOS) 15/12/10
Maturity Date (MD) 15/12/17
Number of Periods to Maturity (NOP) 7

Outputs

Coupon (Cp) 35

Bond Yield Using IRR & XIRR

IRR XIRR
Period Cash flows Year Cash flow
0 -1027.42 15-Dec-10 -1027.42
1 35 15-Jun-11 35
2 35 15-Dec-11 35
3 35 15-Jun-12 35
4 35 15-Dec-12 35
5 35 15-Jun-13 35
6 35 15-Dec-13 35
• Suppose you are going to buy the XYZ bond on
3rd April 2011. Your bond dealer quoted you a
price of Rs.1050 for the bond plus an accrued
interest. How much will you be paying for the
bond.
 Bond Value with Accrued Interest

Inputs
Face Value (M) 1000
Coupon Rate (Annual) (CR) 7%
Issue Date 15/12/10 YTM of the Bond
Maturity Date (MD) 15/12/17 Year Bond Cash flows
Number of Periods to Maturity (NOP) 7 3/4/11 -1070.90
Purchase Date 3-Apr-11 15/12/11 70
Quoted Bond Price 1050 15/12/12 70
15/12/13 70
Outputs 15/12/14 70
15/12/15 70
Accrued Interest 15/12/16 70
Bond purchase date 3-Apr-11 15/12/17 1070
Previous coupon date 15/12/10 YTM using XIRR 6.06%
Next coupon date 15/12/11
Coupon over the year 70

Number of days since last coupon 109

Number of days between coupons 365

Accrued Interest 20.90

Actual Bond Price Paid

Quoted Bond Price 1050
Accrued Interest 20.90
Bond Price 1070.90