Discussion 1

Issue

28-Jul-14

Current interest rate

Rate of Interest to be
8.40% Semi-Annual paid for Bond
28-Jul-24
Dirty of Full
Price
Accr Int
17-Jan-15
108.6757
3.9433

Coupon
Maturity
Today
Date
28-Jan-15
28-Jul-15
28-Jan-16
28-Jul-16
28-Jan-17
28-Jul-17
28-Jan-18
28-Jul-18
28-Jan-19
28-Jul-19
28-Jan-20
28-Jul-20
28-Jan-21
28-Jul-21
28-Jan-22
28-Jul-22
28-Jan-23
28-Jul-23
28-Jan-24
28-Jul-24

Years
0.0306
0.5306
1.0306
1.5306
2.0306
2.5306
3.0306
3.5306
4.0306
4.5306
5.0306
5.5306
6.0306
6.5306
7.0306
7.5306
8.0306
8.5306
9.0306
9.5306

Cash Flow
4.20
4.20
4.20
4.20
4.20
4.20
4.20
4.20
4.20
4.20
4.20
4.20
4.20
4.20
4.20
4.20
4.20
4.20
4.20
104.20

PV
4.1903 By Excel Fn
4.0352
3.8858
3.7419
3.6034
3.4699
3.3415
3.2178
3.0986
2.9839
2.8734
2.7670
2.6646
2.5659
2.4709
2.3794
2.2913
2.2065
2.1248
50.7636

Discussion 2
Today
Mat Years

19-Jan-15 Annual Coupon

Yield
Mat date
Coupons
Price
9
19-Jan-24
3%
10
19-Jan-25
15%

10.00%

9.00%
Price

59.69
130.72

64.03
138.51

If interest rate change by 1% price change in percent is given by Modified Duration

% change in bond price = modified duration times change in interest rate OPPOSITE DIRECTION
APPROXIMATION : Works best for small changes in rates say0.25% or less
Bank
amount
mduration
ratesdown by 1%

deposits
loans
1000
2.3

1000 crore
2.9 Years

Loss
23

Gain
29

Asset Liability Matching

Interest risk avoided by setting asset duration= liability

net
6

7.6897%
Semi-Annually compounded
Clean or Quoted
Price
Today
104.7324

3.8449%

28-Jan-15
104.7266

104.7324
7.6897%

3.9491

4.0445
3.8947
3.7505
3.6117
3.4780
3.3492
3.2252
3.1058
2.9908
2.8800
2.7734
2.6707
2.5718
2.4766
2.3849
2.2966
2.2116
2.1297
50.8807

11%

% Change

d Duration
e OPPOSITE DIRECTION

Duration
7.27%
7.66
5.95%
6.28

Modified
% Change Duration
55.70
-6.67%
6.96
123.56
-5.48%
5.71

1.100
1.100

Bond
Date of
Settlemen Date of Issue
t (Today)
17-Jan-15
17-Jan-15
17-Jan-15

28-Jul-14
28-Jul-14
28-Jul-14

Net Present value

Total No of
Interest
Payment
Rate
Period
4.50%
113
6.00%
6
-56.31%
1.5
7.00% 10.24476835
8.00%
30
12.00%

Interest
Rate
10.00%
10.00%
10.00%

Date of
Maturity

28-Jul-24
28-Jul-24
28-Jul-24

Coupon Rate

8.40%
8.40%
8.40%

Payment
Value/
Present Value
Annuity
-$100.00
$0.00
-$10,000.00
$49,173.24
$0.00
-$9.42
$0.00
-$100.00
$17,765.49

365
730
1095

$20,000.00 -$370,000.00
$20,000.00
$420,000.00

Total No of
Payment
Period
100
Infinity
Infinity

Payment
Value/
Present Value
Annuity
-$100.00
$999.93
$100.00
$1,000.00
$100.00
$5,000.00

Current
Frequency
interest
in Year
rate/ Yield
7.6897%
7.6897%
7.6897%

Type

2
2
2

Net
Present
Value

0
0
0
0

372678.6

Type
0
0
0

Growth
Rate

8.00%

Interset Rates
Nominal
No of
Effective
Interest Compoundin
Interest rate
rate
g per annum
6.20%
6.00%
6.03%

1
12
12

6.20%
6.17%
6.20%

Returns the effective annual interest rate, given the nomina

Returns the nominal annual interest rate, given the effective

Clean or
Quoted
Price
$104.7324
$104.7324
$104.7324

Accr Int

Modified
Duration=
Dirty or Full Duration
Volatility (%) Duration
Price
(Years)
=duration /
(1+yield)

$4.0367 $108.7691 6.567095

$4.0367 $108.7691 6.567095
$4.0367 $108.7691 6.567095

6.3239483 6.323948
6.3239483 6.323948
6.3239483 6.323948

Yield

7.6897%
7.6897%
7.6897%

Future Value

$319,090.78 Returns the future value of an investment based on periodic, constan

$0.00 Returns the present value of an investment. The present value is the
$2.72 Returns the interest rate per period of an annuity.
$200.00 Returns the number of periods for an investment based on periodic,
-$200,000.00 Calculates the payment for a loan based on constant payments and

Future Value
$0.00
$0.00 Perpetuity =CF/r
$0.00

Cash Flow in very far in future is not worth at

Most common currency is Money today.
Have everything converted in common curren
PV of Growing perpetuity=1/(r-g)

nterest rate, given the nominal annual interest rate and the number of compounding periods per year.

terest rate, given the effective rate and the number of compounding periods per year.

on periodic, constant payments and a constant interest rate

present value is the total amount that a series of future payments is worth now

t based on periodic, constant payments and a constant interest rate.

tant payments and a constant interest rate.

uture is not worth at all. this decides most of the investment decision
Money today.
ed in common currency

iods per year.

Bonds