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Duration Examp

The document discusses how to calculate bond prices using the present value function in Excel. It provides an example of calculating the price of a 10-year bond with a $1,000 face value, 10% annual coupon rate, and 10% yield to maturity (YTM). It then calculates the bond's duration and shows how duration can be used to estimate the change in price given a change in interest rates.

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Muhammad Ali Meer
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70 views10 pages

Duration Examp

The document discusses how to calculate bond prices using the present value function in Excel. It provides an example of calculating the price of a 10-year bond with a $1,000 face value, 10% annual coupon rate, and 10% yield to maturity (YTM). It then calculates the bond's duration and shows how duration can be used to estimate the change in price given a change in interest rates.

Uploaded by

Muhammad Ali Meer
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLS, PDF, TXT or read online on Scribd
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Semmiannual?

1 set to 2 if semiannual-- divides rate by 2, multiplies nper by 2 …


NPER 10
Face Value $1,000
Coupon Rate 10%
YTM 10%
PV_t
(pv of each
payment at time
Year Cash Payment t)
1 $100.00 $90.91 C7 is B7/(1+$B$3)^A7
2 $100.00 $82.64 C8 is B8/(1+$B$3)^A8
3 $100.00 $75.13
4 $100.00 $68.30
5 $100.00 $62.09
6 $100.00 $56.45
7 $100.00 $51.32
8 $100.00 $46.65
9 $100.00 $42.41
10 $100.00 $38.55
10 $1,000.00 $385.54
V of Bond = sum of Col C --> $1,000.00

"- Today's Price"


YTM =
des rate by 2, multiplies nper by 2 …

Bonds Prices can be calculated using the Present Value function in Excel. SEE INSERT:FUNCTION

Rate is the yield of the bond (YTM) divided by 2 if payments


are semiannual.

Nper is the total number of periods. A 10 year bond


+$B$3)^A7 compounded semiannually, would have 20 periods.
+$B$3)^A8
Pmt is the coupon payment. In our example, the bond has a
10% CR with an annual coupon of $100.00 ($50
semiannual).

Fv is the face value of the bond, $1000.

Type defines the timing of the payments. If payments are


made at the beginning of the period then type is 1. Coupon
payments typically come at the end of the period—enter 0.

The present value is negative because this is a payment for


the bond, and the future value and payments are positive
because these are payments you receive.

PV(10%,10,100,1000,0) ($1,000.00)

TRY USING RATE FUNCTION to calculate YTM

Nper is the total number of periods. A 10 year bond


compounded semiannually, would have 20 periods.

Pmt is the coupon payment. In our example, the bond has


a 10% CR with an annual coupon of $100.00 ($50
semiannual).

PV is the Present Value —the price of the bond—entered as


a negative # since you are paying that amount.

Fv is the face value of the bond, $1000.

Type defines the timing of the payments. If payments are


made at the beginning of the period then type is 1. Coupon
payments typically come at the end of the period—enter 0.
RATE($B$2,$B$3*$B$4,$B$3,0,$B$4) 10.00%
NSERT:FUNCTION

bond (YTM) divided by 2 if payments

r of periods. A 10 year bond


ually, would have 20 periods.

ment. In our example, the bond has a


l coupon of $100.00 ($50

he bond, $1000.

of the payments. If payments are


of the period then type is 1. Coupon
e at the end of the period—enter 0.

egative because this is a payment for


e value and payments are positive
ments you receive.

of periods. A 10 year bond


lly, would have 20 periods.

ent. In our example, the bond has


l coupon of $100.00 ($50

—the price of the bond—entered as


e paying that amount.

e bond, $1000.

f the payments. If payments are


the period then type is 1. Coupon
at the end of the period—enter 0.
Face Value $1,000 Red values are given in problem
Coupon Rate 10%
YTM 10%
PV_t Year*Weight in
(pv of each Share of Col D
payment at time total PV = (weighted Avg
Year Cash Payment t) PV_t/Price B of each Year)
1 $100.00 $90.91 9.09% 0.09
2 $100.00 $82.64 8.26% 0.17
3 $100.00 $75.13 7.51% 0.23
4 $100.00 $68.30 6.83% 0.27
5 $100.00 $62.09 6.21% 0.31
6 $100.00 $56.45 5.64% 0.34
7 $100.00 $51.32 5.13% 0.36
8 $100.00 $46.65 4.67% 0.37
9 $100.00 $42.41 4.24% 0.38
10 $100.00 $38.55 3.86% 0.39
10 $1,000.00 $385.54 38.55% 3.86

V of Bond = sum of Col C --> $1,000.00 6.76 <-- Sum of Col E = Duration

Interest Rate Risk


%∆P = - DUR x ∆i/(1+i)

Duration 6.76
Original Price 1000.00
New YTM 11.00%
Old YTM 10.00%
∆i/(1+i) 0.91% <-- (B18 - B19)/(1+B19)
%∆P = -6.14% <-- -DUR*B27
∆P = %∆P*Old -$61.45
New P = $938.55
DURATION(settlement,maturity,coupon,yld,frequency,basis)

settlement 2-Jan-09 Settlement is the security's settlement d


Maturity 2-Jan-19 Maturity is the security's maturity date.
coupon 10% Coupon is the security's annual coupon
Yield 10% Yld is the security's annual yield.
freq 1 Frequency is the number of coupon pay
basis 3 Basis is the type of day count basis to u

DURATION(settlement,maturity,coupon,yld,frequency,basis)

6.76450327 which is what we found above

Day count
- Sum of Col E = Duration Basis
basis
0 or omitted US (NASD)
30/360
1 Actual/actual
2 Actual/360
3 Actual/365
4 European
30/360
he security's settlement date. The security settlement date is the date after the issue date when the security is traded to t
security's maturity date. The maturity date is the date when the security expires.
security's annual coupon rate.
ity's annual yield.
e number of coupon payments per year. For annual payments, frequency = 1; for semiannual, frequency = 2; for quarter
e of day count basis to use.
he security is traded to the buyer.

equency = 2; for quarterly, frequency = 4.

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