Bond Yields:

i) Current Yield
ii) Yield to Maturity
iii) Zero Coupon Yield: Spot rates

Current Yield = Annual Coupon Amount / Current Market price

Example: Calculating Current Yield

Face Value 1000 1000 1000
Coupon 12% 12% 12%
Market Price 986 1000 1110
Current Yield 12.17% 12.00% 10.81%

Relationship between Coupon, Curr. Yield and MP

For bonds trading at discount, CY>CR
For bonds trading at premium, CY<CR
For bonds trading at par, CY=CR

Advantages / Disadvantages of Current Yield?

Advantage: Easy Calculation
Disadvantage:Does not consider all cash flows
No discount or premium of bonds is considered

YTM: Same concept as IRR. It is the rate at which cash flows of the bond are discounted to
arrive at market price of the bond.

Advantages / Disadvantages of YTM?

Advantage: Considers all cash flows, widely used measure of bond return
Disadvantage:Assumes same reinvestment rate as ytm
Only a promised yield not actual return

Calculating YTM from market prices

CCIL website data:
Maturity Date 1/14/2029 1/8/2028 Par
CMP 103.105 101.44
YTM
Settlement Date 7/16/2019 7/16/2019

Coupon Rate 7.26% 7.17%

Example: Using YTM to calculate bond's price

Bonds Par Coupon rate YTM

A 100 8% 8.00%
B 100 8% 8.50%
C 100 8% 7.50%
 Coupon payments are annual
Maturity of all bonds is 4 years

Bond A's CMP: Bond B's CMP:

Years CF PVCF Years CF PVCF

Par 1000 Maturity 2.5 years

Coupon rate 6.25% YTM 7.20%
Coupon payment: semi-annual
Price?
Time CF PVCF

Clean & Dirty Prices

Clean prices are prices without accrued interest.
These are generally the Quoted Prices.
Dirty prices are with accrued interest, seller revceives dirty price,
buyer pays dirty price. Also called full price.

DCC 30 / 360 A/ 365

G Secs Corp bonds
Annuity no annuity
IRR XIRR
Two ways to do it
Bond Par 100 1st Step: treat next coupon date as T=0
Remaining maturit 4.5
Coupon rate 7%
ytm 6.40%
Coupon payment Annual
Calculate clean and dirty prices.
2nd step: Add first cash flow to the above value

3rd step: Discount this to T = 0 to get dirty price

4th : Calculate acc int and clean price

acc int
clean price
Calculate the clean and dirty price
Remaining maturity 14 months
Par 1000
Coupon 3.40%
Coupon payment quarterly
ytm 4.10%
Clean Price?

Time CF PVCF Time CF PVCF

After 2 months
Dirty Price
Acc Int
Clean price

Calculating realized yield

Bond F V 100
Coupon 8.50%
YTM 8.50%
Maturity 5

What will be the realized yield if interest rates are as follows?

0 to 1 Yr 8.50%
1 to 2 Yr 7.85%
2 to 3 Yr 7.15%
3 to 4 Yr 6.25%
4 to 5 Yr 6.45%

Realized Return Calculation

CF Int. on Bal. End Bal.
End of Yr1
End of Yr2
End of Yr3
End of Yr4
End of Yr5

Investment
End value
Yrs
 IRR

9 Value the following bond using ZCYC

Par 100
Coupon 7.89%
Maturity in years 2
DCC 30/360 DCC

ime CF ZCY PV
1
2
3
4

Using Excel formula: Be careful!

Maturity 7/14/2021
Par 1000.00
Coupon 7.76%
Settlement date 7/15/2019
Price
Yield 8.255%

Long Term Vs. Short Term Bonds

Bond P Q
Settlement date 8/4/2009 8/4/2009
Maturity in Years 8/4/2011 8/4/2015
Face Value 100 100
Coupon 9.50% 9.50%
Yield required 9.50% 9.50%
Frequency of
coupon payment Semi Annual Semi Annual
Current price 100.00 100.00
New Yield 11.00% 11.00%
New Price
% price change

High Coupon Vs. Low Coupon Bonds

Bond P Q
Settlement date 2/11/2008 2/11/2008
Maturity date 2/11/2011 2/11/2011
Face Value 100 100
Coupon 6.50% 10.50%
Yield required 9.50% 9.50%
Frequency of
coupon payment Semi Annual Semi Annual
Existing price 92.33 102.56
New Yield 11.00% 11.00%
New Price
% price change

Valuing Bonds in between coupon dates

Bond P Q
Face Value 100 100
Coupon 7.80% 8.20%
Yield required 7.44% 7.66%
Frequency of cou Semi-annual Semi-annual
Last Coupon paid 5/3/2010 2/23/2019 0.455
Next Coupon due 11/3/2010 8/24/2019
Settlement date 5/24/2010 7/15/2019
Maturity date 5/3/2020 2/15/2022
DCC 30 / 360 30 / 360
Dirty Price
Accrued Interest
Clean Price

Risks of bond investing:

i) Interest rate risk

a) Price risk
b) Reinvestment risk

ii) Credit risk

a) Default risk
b) Downgrade risk
c) Credit spread risk

iii) Inflation

iv) Liquidity

Calculating Macaulay and Modified duration

Modified Duration:
Measures sensitivity of Bond price to 100 bps change in yield

DMod = DMac / (1+ytm/f)

Calculate Macaulay and Modified Duration

Par 1000 Maturity 5 years

Coupon 8% Coupon payment: annual
ytm 9.0%
 Time CFs PVCFs Time*PVCF
D Mac =

D Mod =

What is the change in price if yields increase Change indicated by durati New price
i) 100 basis points 0.0000% ₹ 924.18
ii) 40 basis points 0.0000% ₹ 946.11
iii) 180 basis points 0.0000% ₹ 895.99

% change in price = -MD*delta Y

Conclusion:
DMod is a good approximation when yield change is smaller, but it is a poor approximation when
This happens because of Bond Convexity
re discounted to

ure of bond return

 Bond C's CMP:
Years CF PVCF

ate as T=0

to the above value

= 0 to get dirty price

 Actual ch Error

r approximation when