Bond Pricing

When a company decides to issue bonds, it must price them so that they are attractive to potential investors in the market. In order to do this the company must decide on the face value
(maturity value), coupon payment, coupon rate, and yield rate (return on bond). The market value or bond price is the present value of the future cash flows from the bond.

Bonds are typically issued with a face value, or value at maturity, of $1000. The coupon payment varies among bonds and therefore affects the market value of the bond, the higher the
coupon the higher the market value. The number of periods and consequently the number of payments also affects the market value of the bond. The yield is the rate of return that
investors require in order to invest in the bonds.

Present Value Equation

VB = Market Value
n
rM M
VB   c  M = Maturity Value

t 1 (1  rD )
rc = Coupon Rate
(1  rD ) n
rD = Required Rate of Return
n = number of periods to maturity

Example:

JonesCo has decided to issue bonds to raise additional financing for future growth. How much capital will it raise if it issues 1,000 ten year bonds with a maturity of $1000 and an annual
coupon rate of 10% that is paid semiannually. JonesCo has also determined that investors require an annual return rate of 12%.

5 % * 1000 1 % * 1000 5 % * 1000 5 % * 1000 5 % * 1000 5 % * 1000 5 % * 1000 5 % * 1000

VB        
(1  6 %) 1
(1  6 %) 2
(1  6 %) 3
(1  6 %) 4
(1  6 %) 5
(1  6 %) 6
(1  6 %) 7
(1  6 %) 8
5 % * 1000 5 % * 1000 5 % * 1000 5 % * 1000 5 % * 1000 5 % * 1000 5 % * 1000 5 % * 1000 5 % * 1000
        
(1  6 %) 9
(1  6 %) 10
(1  6 %) 11
(1  6 %) 12
(1  6 %) 13
(1  6 %) 14
(1  6 %) 15
(1  6 %) 16
(1  6 %) 17
5 % * 1000 5 % * 1000 5 % * 1000 1000
   
(1  6 %) 18
(1  6 %) 19
(1  6 %) 20
(1  6 %) 20
 47 . 16  44 . 49  41 . 98  39 . 60  37 . 36  35 . 24  33 . 25  31 . 37  29 . 59  27 . 91  26 . 33  24 . 84  23 . 44  22 . 11 
20 . 86  19 . 68  18 . 56  17 . 51  16 . 52  15 . 59  311 . 80
 885 . 30
The market value for the bond is 885.30 or in other words the present value of the future cash flows is 885.30. If JonesCo issues 1,000 of these bonds they will raise approximately
$885,300 dollars.

Bond Valuation Using Excel

Bonds can be easily calculated using the Present Value function in Excel. This function is labeled PV and stored under the financial category. The inputs are similar to a financial
calculator.

Rate is the yield of the bond per period. In the case of this bond it has a
annual yield of 12% and a semiannual yield of 6%.

Nper is the total number of periods. This is a 10 year bond compounded

semiannually, therefore there are 20 periods.

Pmt is the coupon payment per period. This bond has an annual coupon
payment of 10% or $100 and a semiannual coupon of 5% or $50.

Fv is the future value or face value of the bond. This bond has a face value
of $1000.

Type is used to define the timing of the payments. If the payments are made
at the beginning of the period enter 1. If the payments come at the end of
the period leave blank or enter 0. Coupon payments typically come at the
end of the period.

Note that the present value is negative while the payment and future values
are positive. 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.
Redemption at Par

Redemption at Par
Redemption with 10% Premium

A bond with a face value 1000 and with a coupon 10

redeemed at 10% premium
calculate the value or the price of the bond
tenor 5 years and the yield is 6.25%
Bond with Semi Annual Coupon
A bond with a face value 1000 and with a coupon 10
redeemed at 10% premium
calculate the value or the price of the bond tenor 5 y

divide Yield by 2
Multiply Tenor *2
Coupon amount
Premium

ue 1000 and with a coupon 10% annual

the price of the bond

yield is 6.25%
 Years Future value P
1 100
2 100
3 100
4 100
5 1200

al Coupon
ue 1000 and with a coupon 10% Semi Annual Coupon

the price of the bond tenor 5 years and the yield is 6.25%

yield 3.13%
Tenor 10
50
Coupons Future value P
1 50
2 50
3 50
4 50
5 50
6 50
7 50
 8 50
9 50
10 1150
 Present Value @DiscounPV of Value of Payment
0.941176470588235 94.11764705882
0.885813148788927 88.58131487889
0.833706492977814 83.37064929778
0.784664934567354 78.46649345674
0.738508173710451 886.2098084525
1230.745913145

s 6.25%

Present Value @DiscounPV of Value of Payment

0.96969696969697 48.48484848485
0.940312213039486 47.01561065197
0.911817903553441 45.59089517767
0.884187057991215 44.20935289956
0.85739351077936 42.86967553897
0.831411889240592 41.57059446203
0.806217589566634 40.31087947833
0.781786753519161 39.08933767596
0.758096245836762 37.90481229184
0.735123632326557 845.3921771755
1232.438183837
Using NPV

using PV function

Using NPV

using PV function
yield
Tenor
Using NPV formula
₹1,230.75

₹1,230.75

Using NPV formula

₹1,232.44

₹1,232.44
6.
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 COUPON 50 50

₹940.25 ₹1,065.04
₹940.25

NOTE : - Ve sign is incorporated for present value

For Semi Annual Coupon,
Multiply the tenor by 2
Divide Annual coupon amount by 2
 10%When the yield decreases, the bond price inceases
0.05000
20
50

₹1,000.00
price inceases
NOTE WHEN YIELD CHANGES , PRICE CHANGES INVERSELY
E CHANGES INVERSELY
 1) face value
coupon rate
term
Rq rate of return

COUPON AMT

Annual Coupon Price of the bond

Semi Annual Price of the bond
Quarterly Coupon Price of the Bond
Monthly Coupon Price of the Bond

NOTE ;
COUPON FREQUENCY ANNUAL
COUPON FREQUENCY SEMI ANNUAL
COUPON FREQENCCY QUARTERLY
COUPON FREQUENCY MONTHLY

NOTE : WHEN THE FREQUENCY OF COUPON PAYMENT INCREASES , TH

WITH ALL OTHER FACTORS REMAINING CONSTANT

2) face value 1000

coupon rate 8%
term 3
COUPON AMOUNT 80
MARKET INT RATE Rq rate of return 6%
RQ rate of return 8%
Rq rate of return 12%

PRICE OF THE BOND

PRESENT VALUE OF THE
COUPON PAYMENTS +
 1000
8%
3 Years
6%

80 40

₹1,053.46
₹1,054.17
₹1,054.54
₹1,054.79

COUPON RATE * FACE VALUE

COUPON RATE /2, COUPON AMOUNT , NO OF PAYMENTS * 2, YIELD OR RE
R/4, N*4, YIELD /4
R/12, N*12, YIELD /12

AYMENT INCREASES , THE PRICE OF THE BOND INCREASES,

CONSTANT

annual
Years

YTM 4% 9.000%
₹1,111.00 ₹974.69
Premium Bond
 annual

NT , NO OF PAYMENTS * 2, YIELD OR REQ /2

>
8% 12%
₹1,000.00 ₹903.93
At Par Discounted Bond
Face value of a Debenture = Rs. 1,000
Annual Interest Rate of Debenture = 12%
Maturity Period = 5 years
What is the value of the debenture, if:
(a) Required rate of return is 12%
(b) Required rate of return is 15%
(c) Required rate of return is 10%

FACE VALUE 1000

COUPON RATE 0.12ANNUAL
COUPON AMT 120
TERM 5YEARS

(a) Required rate of return is 12%

(b) Required rate of return is 15%
(c) Required rate of return is 10%

Problem to calculate the Yield

Face value of a Debenture = Rs. 1,000
Coupon Rate 12% Coupon Amount A
Maturity Period = 5 years
PRICE OF THE BOND

YIELD OR REQ RATE OF RETURN

Problem to calculate the Yield

Face value of a Debenture = Rs. 1,000
Coupon Rate 12% Semi Annual Coup
Maturity Period = 5 years
PRICE OF THE BOND Given by the market
For Semi Annual Coupon Tenor must be multiplied

YIELD OR REQ RATE OF RETURN

Multiply by 2

Note :
While calculating Present value of a bond using PV function
For Annual Coupon
,=-PV(RATE,NPER,PMT,FV,0)
RATE IS THE ANNUAL YIELD
NPER IS THE NO OF YEARS OR THE TERM
PMT IS THE COUPON PAYMENT
FV IS THE REDEMPTION VALUE

For SEMI ANNUAL COUPON

,=-PV(RATE,NPER,PMT,FV,0)
RATE IS THE ANNUAL YIELD DIVIDED BY 2
NPER IS THE NO OF YEARS OR THE TERM * MULTPLIED BY 2
PMT IS THE COUPON PAYMENT (SEMI ANNUAL AMOUNT
FV IS THE REDEMPTION VALUE (NO CHANGE OTHER THAN TH
 12% ₹1,000.00
15% ₹899.44
10% ₹1,075.82

1000
oupon Amount Annual 120
5YRS
 980.00

12.563%

1000
emi Annual Coupon 60
5YRS
980.00
10.00

Semi Annual Yield 6.28%

Annualized Yield 12.55%

ng PV function
ULTPLIED BY 2
UAL AMOUNT)
OTHER THAN THE GIVEN VALUE)
NOTE : GILT MEANING GOVT SECURITY
A 6% GILT IS TRADING AT PAR (USD 100) AND HAD PRECISELY FIVE YE
CALCULATE

(A) THE PRICE OF GILT WHEN THE YIELD IS 5.43%

(B) THE CHANGE IN PRICE WHEN THE YIELD IS 5.3%
© THE CHANGE IN THE PRICE WHEN THE PRICE SUBSEQUENTLY CHAN
ALWAYS GOVT SECURITIES COUPONS ARE SEMI ANNUAL

GIVEN
FACE VALUE
MATURITY
COUPON
YIELD
PRICE

A BOND IS TRADED FOR SETTLEMENT ON 1ST AUG 1999. THE BOND H

1ST AUG EACH YEAR AND MATURES ON 1ST AUG 2009. WHAT IS THE
IS 6%
₹107.36

VALUING ZERO COUPON BONDS

A ZERO COUPON BOND WITH 5 YEARS MATURITY IS TRADING AT EUR

Current Price 77.795

Redemption Price or Face value (sh 100
Term 5
=(100 / 77.795)^1/5 -1 Future Value = Face Value = Redem
Current value = Current Price
0.051500934451237
5.150%
RECISELY FIVE YEARS TO MATURITY

SEQUENTLY CHANGES TO 5.5%

100
5
6%
5.43% 5.30%
₹102.47 ₹103.04

999. THE BOND HAS A COUPON OF 7% PAYS ANNUAL COUPON ON

09. WHAT IS THE PRICE OF THE BOND IF THE REQUIRED YIELD
TRADING AT EURO 77.795. WHAT IS THE YIELD TO MATURITY?

Not given but based on given current price

Years
ce Value = Redemption value
urrent Price
Using Rate function in Excel
5.150%
 5.50%
₹102.16

NUAL COUPON ON
QUIRED YIELD
O MATURITY?
A bond with a face value 1000 and with a coupon 10% annua
redeemed at 10% premium
calculate the value or the price of the bond
tenor 5 years and the yield is 6.25%

Years Future value PayPresent Value

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

A bond with a face value 1000 and with a coupon 10% annua
redeemed at 10% premium
calculate the value or the price of the bond
tenor 5 years AND THE CURRENT MARKET PRICE OF THE BON

TENOR 5 YEARS
FACE VAUE 1000
REDEMPTION 1100
PRICE OR CMP 985
YIELD OR YTM 11.99%
 PV 9000
FV 10,000
N 3
YIELD ?
3.57%

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
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 20
NO OF PAYMENTS NPER 20
REQ RATE 0.03
PRICE OF THE BOND ₹906.59

REDEMPTION VALUE
TENOR
COUPON AMOUNT
YIELD
FREQUENCY OF COUPON
PRICE OF THE BOND
coupon 10% annual

yield
Tenor

PV of Value of Payment
94.1176470588235 Using NPV
88.5813148788927
83.3706492977814 using PV function
78.4664934567354
886.209808452541
1230.74591314477

coupon 10% annual

T PRICE OF THE BOND IS 985

COUPON AMT
FV PMT
PV
 Using NPV function
40
SEMI ANNUAL 40
PREMIUM 40
YEARS 40
PA 40
40
40
40
40
DIVIDE BY 2 1140
MULITPLY BY 2
DIVIDE BY 2
QUARTERLY
PREMIUM
YEARS
PA

DIVIDE BY 4
MULITPLY BY 4
DIVIDE BY 4

FV 1100
5
80
12%
ANNUAL SEMI ANNUAL QTRLY
₹912.55 ₹908.64 ₹906.59
 6.25%
5

Using NPV formula

₹1,230.75

₹1,230.75

yield ???
Tenor 5

100
100
function

₹908.64
MONTHLY
₹905.19
Years To Maturity 10
n 2 Coupon Frequency
Coupon Rate 6%
Coupon Rate/n 3% Coupon Rate /2
YTM 6% Req rate of Return
YTM/n 0.03 YTM/2
Total Periods 20 N*2
Coupon PMT -$30.00 Coupon /2
Face -$1,000.00
PV = Price

Years To Maturity 10
n 2
Coupon Rate 6%
Coupon Rate/n 3%
YTM 7%
YTM/n 0.035
Total Periods 20
Coupon PMT -$30.00
Face -$1,000.00
PV = Price $928.94 Discount
 Face Value of Bond
(Redemption Value)
1000 No of period
15 Annual Yield
9.40%
Price of a coupon
259.86 bond
Value of zero
coupon bond
using Annual basis

1000
15
9.40%

₹259.86 Using PV Function

259.86044034112face value / (1+ Y)^n
Face Value
Term
Coupon Frequency
Coupon Rate
Coupon Amount

YTM Discount Rate

0.045
0.050
0.055
0.060
0.065
0.070
0.075
0.080
0.085
0.090
0.095
0.100
0.105
0.110
0.115
0.120
0.125
0.130
0.135
0.140
0.145
0.150
0.155
0.160
0.165
0.170
0.175
0.180
0.185
0.190
0.195
0.200
 1000
20 Years 40
Semi Annual
10%
100 50

Bond Price
₹1,720.32
₹1,627.57
₹1,541.76
₹1,462.30
₹1,388.65
₹1,320.33
₹1,256.89 Bond Pric
₹1,197.93
₹2,000.00
₹1,143.08
₹1,800.00
₹1,092.01
₹1,600.00
₹1,044.41
₹1,400.00
₹1,000.00
₹1,200.00
₹958.53
₹1,000.00
₹919.77
₹800.00
₹883.50
₹600.00
₹849.54 ₹400.00
₹817.70 ₹200.00
₹787.82 ₹0.00
₹759.75 0.020 0.040 0.060 0.080 0.100

₹733.37
₹708.53
₹685.14
₹663.08
₹642.26
₹622.59
₹603.99
₹586.39
₹569.71
₹553.89
₹538.87
₹524.61
₹511.05
 Bond Price

0.040 0.060 0.080 0.100 0.120 0.140 0.160 0.180

CALLABLE BOND

FACE VALUE OF THE BOND 1000

COUPON RATE 8%
TERM 5YEARS
CURRENT PRICE 1150
THE BOND HAS GOT A CALLABLE OPTION AT THE END OF 3 YE
BOND ISSUER CAN RECALL THE BOND FROM THE INVESTOR A

YIELD TO CALL YTC

TERM 3YEARS
YTC 2.73%
YTM 4.6%

CURRENT YIELD ANNUAL COUPON AMOUNT / CURR

80
1150
6.96%
 ANNUAL

THE END OF 3 YEARS

THE INVESTOR AT THE END OF 3 YEARS

AMOUNT / CURRENT PRICE OF THE BOND

Calculate the price of the following bonds

(a) Annual Coupon Payments

(b) Semi Annual Coupon Payments
© Quarterly Coupon Payments

Bond
1
2
3
4
5
e of the following bonds

n Payments FACE VALUE

oupon Payments
pon Payments

Coupon % Term to Maturity

5% 5
7% 7
7% 8
8% 10
6% 20
 100

Annual Coupon
Yield %
5.05% ₹99.78
5.15% ₹110.65
5.25% ₹111.20
5.45% ₹119.27
5.65% ₹104.13
SEMI ANNUAL QUARTERLY

₹99.78 ₹99.78
₹110.76 ₹110.81
₹111.31 ₹111.37
₹119.46 ₹119.56
₹104.16 ₹104.18
The following features of the bond

Bond face value and redemption value

Coupon Rate
Coupon Frequency
Tenor
For different yields , calculate the price of the bond a

Note : Yield is also known as Market Interest rate, in

Yield Price
4.0000% ₹1,327.03 ₹1,400.00

₹1,200.00
4.2500% ₹1,302.92 ₹1,000.00

4.5000% ₹1,279.36 ₹800.00

4.7500% ₹1,256.34 ₹600.00

5.0000% ₹1,233.84 ₹400.00

₹200.00
5.2500% ₹1,211.84 ₹0.00

5.5000% ₹1,190.34
5.7500% ₹1,169.32
6.0000% ₹1,148.77
6.2500% ₹1,128.69
6.5000% ₹1,109.05
 6.7500% ₹1,089.84
7.0000% ₹1,071.06
7.2500% ₹1,052.70
7.5000% ₹1,034.74
7.7500% ₹1,017.18
8.0000% ₹1,000.00
8.2500% ₹983.20
8.5000% ₹966.76
8.7500% ₹950.69
9.0000% ₹934.96
9.2500% ₹919.57
9.5000% ₹904.52
9.7500% ₹889.79
10.0000% ₹875.38
10.2500% ₹861.27
10.5000% ₹847.47
10.7500% ₹833.96
11.0000% ₹820.74
11.2500% ₹807.80
11.5000% ₹795.14
11.7500% ₹782.74
12.0000% ₹770.60
12.2500% ₹758.72
12.5000% ₹747.08
12.7500% ₹735.69
13.0000% ₹724.54
13.2500% ₹713.61
13.5000% ₹702.92
13.7500% ₹692.44
14.0000% ₹682.18
14.2500% ₹672.13
14.5000% ₹662.28
14.7500% ₹652.64
15.0000% ₹643.19
15.2500% ₹633.94
15.5000% ₹624.87
15.7500% ₹615.98 ₹1,400.00
16.0000% ₹607.27
16.2500% ₹598.74
₹1,200.00
16.5000% ₹590.38
16.7500% ₹582.18
₹1,000.00
17.0000% ₹574.15
17.2500% ₹566.28
₹800.00
17.5000% ₹558.56
17.7500% ₹550.99
₹600.00
18.0000% ₹543.57
18.2500% ₹536.30
₹400.00
18.5000% ₹529.17
18.7500% ₹522.18
19.0000% ₹515.32 ₹200.00

19.2500% ₹508.59
19.5000% ₹502.00 ₹0.00
0.0000% 5.0000% 10.0000%
 ₹0.00
0.0000% 5.0000% 10.0000%

19.7500% ₹495.53
20.0000% ₹489.19
20.2500% ₹482.96
20.5000% ₹476.86
20.7500% ₹470.87
21.0000% ₹464.99
21.2500% ₹459.23
21.5000% ₹453.57
21.7500% ₹448.02
22.0000% ₹442.57
22.2500% ₹437.22
22.5000% ₹431.97
22.7500% ₹426.82
23.0000% ₹421.76
23.2500% ₹416.80
23.5000% ₹411.93
23.7500% ₹407.14
24.0000% ₹402.44
24.2500% ₹397.83
24.5000% ₹393.30
24.7500% ₹388.85
25.0000% ₹384.48
25.2500% ₹380.19
25.5000% ₹375.98
25.7500% ₹371.84
26.0000% ₹367.77
26.2500% ₹363.78
26.5000% ₹359.85
26.7500% ₹355.99
27.0000% ₹352.20
27.2500% ₹348.48
27.5000% ₹344.82
27.7500% ₹341.22
28.0000% ₹337.69
28.2500% ₹334.21
28.5000% ₹330.80
28.7500% ₹327.44
29.0000% ₹324.14
29.2500% ₹320.89
29.5000% ₹317.70
29.7500% ₹314.56
30.0000% ₹311.47
30.2500% ₹308.44
30.5000% ₹305.45
30.7500% ₹302.52
31.0000% ₹299.63
31.2500% ₹296.79
31.5000% ₹293.99
31.7500% ₹291.24
32.0000% ₹288.54
32.2500% ₹285.88
32.5000% ₹283.26
32.7500% ₹280.68
33.0000% ₹278.14
33.2500% ₹275.65
33.5000% ₹273.19
33.7500% ₹270.77
34.0000% ₹268.39
34.2500% ₹266.05
34.5000% ₹263.74
34.7500% ₹261.47
35.0000% ₹259.23
35.2500% ₹257.03
35.5000% ₹254.86
35.7500% ₹252.72
36.0000% ₹250.62
36.2500% ₹248.54
36.5000% ₹246.50
36.7500% ₹244.49
37.0000% ₹242.51
37.2500% ₹240.56
37.5000% ₹238.63
37.7500% ₹236.74
38.0000% ₹234.87
38.2500% ₹233.03
38.5000% ₹231.22
38.7500% ₹229.43
 1000
8%
Seminannul
10years
ce of the bond and observe the relationship

Interest rate, internal rate of return, expected rate of return, discounted rat

PRICE VS YIELD RELATIONSHIP

₹1,400.00

₹1,200.00

₹1,000.00

₹800.00

₹600.00

₹400.00

₹200.00

₹0.00
 Price

% 5.0000% 10.0000% 15.0000% 20.0000% 25.0000% 30.0000% 35.0000% 40.0000% 45.0000%

% 5.0000% 10.0000% 15.0000% 20.0000% 25.0000% 30.0000% 35.0000% 40.0000% 45.0000%
n, discounted rate
0000% 45.0000%
0000% 45.0000%
PROBLEM NO 1

You buy a 13-week Treasury bill (91 days to maturity) at a price of 99

CALCULATE THE ANNULAIZED RETUR OF INVESTMENT OF

GIVEN
TIME 91 DAYS
CURRENT PRICE OF PURCHASE 99
FACE VALUE AT REDEMPTION 100

YIELD 1.0101%

ANNUALIZED RETURN 4.0515%

NOTE:
Under the investment yield method, the Treasury yield is calculated as
at a price of 99.0. 
ESTMENT OF T BILL

is calculated as a percent of the purchase price, not the face value.

PROBLEM NO 2

an investor that purchases a 90-day T-bill for $9,800 per $10,000 face
CALCULATE THE ANNULAIZED RETUR OF INVESTMENT OF

GIVEN
TIME 91 DAYS
CURRENT PRICE OF PURCHA 9800
FACE VALUE AT REDEMPTIO 10000

YIELD 2.040816%

ANNUALIZED RETURN 8.185692%

per $10,000 face value will have a yield of:
VESTMENT OF T BILL
PROBLEM NO 2

f you have made 3 bucks over 91 days on an investment of Rs.97, then

CALCULATE THE ANNULAIZED RETUR OF INVESTMENT OF

GIVEN
TIME 91 DAYS
CURRENT PRICE OF PURCHA 97
FACE VALUE AT REDEMPTIO 100

DISCOUNT VALUE 3

GIVEN
TIME 91 DAYS
CURRENT PRICE OF PURCHA 97
FACE VALUE AT REDEMPTIO 100

YIELD 3.09278351%

ANNUALIZED RETURN 12.4051207%

Formula can be combined

Yield = [Discount Value]/[Bond Price] * [365/number of days to matu

12.41%
estment of Rs.97, then at this rate, how much would you have made on a year
F INVESTMENT OF T BILL

2.04082 8.16327
umber of days to maturity]
made on a yearly basis?
 Consider you invest in 700GS2023 (7% with a m
Assume, you invested in 150 of these bonds, so
150*98.4
Total Investments = Rs. 14,760/- 14760
Time Period
Period Annualiized Int
0 – 6 Months 7.00%
6 months  – 1 year 7.00%
1 – 1.5 years 7.00%
1.5 – 2 years 7.00%
At Maturity (2 years)

So on an investment of
Rs.14,760/- you will
earn –
525 + 525 + 525 + 525 +
15,000

= 2100 + 15,000
= Rs.17,100/- 17100
Approximation
Yield calculation 7.927%
23 (7% with a maturity of 20223or 2 years from now) at a discount pric
hese bonds, so you’d pay –

Interest Cash flow Remarks

Halif Yearly Int Int Payement Remarks
3.50% 3.5% * 100 * 150 = Rs.525 Half year inter
3.50% 3.5% * 100 * 150 = Rs.525 Half year inter
3.50% 3.5% * 100 * 150 = Rs.525 Half year inter
3.50% 3.5% * 100 * 150 = Rs.525 Half year inter
Principal repayment a150 * 100 = 15,000
discount price of 98.4.

emarks
emarks
alf year interest
alf year interest
alf year interest
alf year interest
If a T Bill with a face value of Rs 100 is issued at Rs 98
implicit yield is

8.16327
=((100/98*100)-100)*4

0.02041 8.1633%
ssued at Rs 98, then the
Suppose that a 91-day US Treasury bill (T-bill) with a
quoted at a discount rate of 2.25% for an assumed 3
Days = 91, Year = 360, and DR = 0.0225
DR Discount rate
Calculate the Price of the T Bill

Given
Face Value 10,000,000
Days 91
DR 2.25%
Year 360
Price or PV 9,943,125.00

The first term, Year/Days, is the periodicity of the an

the odd character of a money market discount rate.
earned on the T-bill, USD56,875 (= 10,000,000 – 9,94
However, the denominator is F V , not PV . In theory
divided by the investment amount (PV )—not divided
includes the earnings (F V ).
 l (T-bill) with a face value of USD10 million is
r an assumed 360-day year.

pricing formula for money market instruments quoted on a discount r

Note : You are deducting discounted value of the investment from the

dicity of the annual rate. Th e second term reveals

discount rate. The numerator, FV – PV, is the interest
,000,000 – 9,943,125), over the 91 days to maturity.
t PV . In theory, an interest rate is the amount earned
V )—not divided by the total return at maturity, which
d on a discount rate basis.

estment from the principal or face value

 Price Quote For Treasury Bills
a Treasury bill with 100 days to maturity, a face valu
selling for $99,100 would be quoted at 3.24% on a ba

Year 360

Discount 3.2400%

Yield 3.2400%
Face value 100,000

Discount amount 900.00000

Current Price 99,100.00

maturity, a face value of $100,000, and
oted at 3.24% on a bank discount basis:
Given
Face value of a bond
Coupon Rate
Term or Maturity of bond
Yield or Discount rate
Value of Bond using PV function
=-PV(E8/2,E7*2,E5*E6*0.5,E5,0)
For Semi Annual Coupon
Term must be multiplied by two
Yield must by divided by two
Coupon Amount must by divided by two

Given
Redemption Value Face value of a bond
Term or Maturity of bond
Yield or Discount rate
Price of the bond
Given
Face Value or Redemption Value of a Bond
Term or Maturity of the Bond
Current Price of the Bond
Coupon Rate
Frequency of the Coupon
Yield Using Rate Function Semi Annual Yield
Annual Yield

Yield using IRR function

Year CFS
0 -890
1 30
2 30
3 30
4 30
5 30
6 30
7 30
8 30
9 30
10 1030
Semi Annual Yield 4.38%
Annual Yield 8.76%

Given
Face Value = Redemption value 1000
Bond is a Zero coupon bond
Current Price of the bond 880
Term or Maturity 3
Rate or Yield (Annual)
Using Rate Function 4.35%
Using Formula
4.353%

Given
Face value 1000
Issue Price 990
Maturity 180
Year 360
Money Market Yield
Face value- Current Price / Current price * 360/180
 100
8% Semi Annual
5Years
6%
₹108.53

100
3Years
6%
₹83.96 =-PV(E21,E20,0,E19,0)
₹83.96 =E19/(1+E21)^3
Future Value /(1+r)^n
 1000
5years
890
6%
Semi Annual
ual Yield 4.38%
8.76%
 Years

days
days

360/180 2.020%
3 Stage FCFE Valuation Illustration
Given
FCFE per share 0.9
Year Present value of CFs
0 0.9
1 0.9945 0.88795
2 1.09892 0.87605
3 1.21431 0.86432
4 1.31753 0.83731
5 1.40316 0.79619
6 1.48034 0.74999
TV 6 16.9417 8.58317
Share Value 13.595
Terminal Value 16.9417D6*(1+3%)/ 12%-3%
 Stage 1 Growth 10.5% for 1 - 3 years
Stage 2 Growth 8.5% for year 4, 6.5% for Year 5
Stage 3 Growth 3% from Year onwards
lue of CFs

Cost of Equity for discounting using CAPM model

Beta 1.8
Risk free rate 3%
Equity risk Premium 5%
Cost of equity= 12.00%

6*(1+3%)/ 12%-3%
1 - 3 years
ear 4, 6.5% for Year 5, 5.5% for Year 6
ear onwards