Scribd
Upload
3 views

CHAP15

The document provides calculations for the duration and modified duration of two bonds, Bond A and Bond B, with interest rates and cash flows detailed. It demonstrates that the proportionate change in bond prices when interest rates increase from 5% to 6% aligns closely with their modified durations. Additionally, it includes information on other bonds, their yields, and cash flows.

Uploaded by

phtsruth
Copyright
© © All Rights Reserved
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
3 views

CHAP15

The document provides calculations for the duration and modified duration of two bonds, Bond A and Bond B, with interest rates and cash flows detailed. It demonstrates that the proportionate change in bond prices when interest rates increase from 5% to 6% aligns closely with their modified durations. Additionally, it includes information on other bonds, their yields, and cash flows.

Uploaded by

phtsruth
Copyright
© © All Rights Reserved
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
You are on page 1/ 6

Question 1: (Using the data q1)If the initial interest rate is 5%, Calculate the duration & modified

duration
for BondA and Bond B using first principle and excel funation. Show that the proportionate change in the
price of the two bonds when the interest rate increases from 5 % to 6 % is approximately equal to their
respective modified duration.

Bond A Bond B
Coupon rat 5% 5%
Maturity 10 20
Face value 1,000.00 1,000.00

PV of Weight* Pv of cash Weight*


Year Bond A cash Flow Weight Period Bond B flow Weight Period
0 -1000 -1000 -1 0 -1000 -1000 -1 0
1 50.00 47.61905 0.047619 0.047619 50.00 47.61905 0.047619 0.047619
2 50.00 45.35147 0.045351 0.090703 50.00 45.35147 0.045351 0.090703
3 50.00 43.19188 0.043192 0.129576 50.00 43.19188 0.043192 0.129576
4 50.00 41.13512 0.041135 0.16454 50.00 41.13512 0.041135 0.16454
5 50.00 39.17631 0.039176 0.195882 50.00 39.17631 0.039176 0.195882
6 50.00 37.31077 0.037311 0.223865 50.00 37.31077 0.037311 0.223865
7 50.00 35.53407 0.035534 0.248738 50.00 35.53407 0.035534 0.248738
8 50.00 33.84197 0.033842 0.270736 50.00 33.84197 0.033842 0.270736
9 50.00 32.23045 0.03223 0.290074 50.00 32.23045 0.03223 0.290074
10 1,050.00 644.6089 0.644609 6.446089 50.00 30.69566 0.030696 0.306957
11 50.00 29.23396 0.029234 0.321574
12 Duration 8.107822 50.00 27.84187 0.027842 0.334102
13 Modified Duration 7.721735 50.00 26.51607 0.026516 0.344709
14 50.00 25.2534 0.025253 0.353548
15 50.00 24.05085 0.024051 0.360763
16 50.00 22.90558 0.022906 0.366489
17 50.00 21.81483 0.021815 0.370852
18 50.00 20.77603 0.020776 0.373969
19 50.00 19.7867 0.019787 0.375947
20 1,050.00 395.734 0.395734 7.914679

Duration 13.08532
Modified Duration 12.46221

Using Excel Function


Bond A Bond B
YTM 0.05 YTM 0.05
Duration 8.107822 Duration 13.08532
Modified Duration 7.721735 Modified Duration 12.46221

Bond Price when Interest Rate is 6%


A ₹ 926.40
Proportionate 7% is approximately equal to the mduration
change in price
Proportionate
change in price

A ₹ 885.30
Proportionate 11% is approximately equal to the mduration
change in price
Face Coupon Yield to
Bond value rate Maturity maturity
A $1,000 0.00% 1 5.00%
B $1,000 5.00% 2 5.85%
C $1,000 10.00% 2 6.00%

a. Price of Bonds
Year Bond A Bond B Bond C
1 1000 50 100
2 1050 1100

Price ₹ 952.38 ₹ 984.38 ₹ 1,073.34

b. Zero Coupon Bond yield for A


Yield 5%

c. Zero Coupon Bond Yield for B


Price ₹ 984.38
PV
First coupon 50 47.61905
Year 2 cash Flow 1050 ₹ 936.76

Yield 5.87%

d. Zero Coupon Bond Yield for C


Price ₹ 1,073.34
Pv
First Coupon 100 95.2381
Year 2 Cash Flow 1100 ₹ 978.10

Yield 6.05%
Bond Settlement date 15-Aug-16
Bond Value 100000000
Coupon Rate 10%
Fianacing Expense 4000000

a.
Semi Annual Coupon
Payment 5000000
Since the bonds are issued at par, the annual yield to the investor is equal to the coupon rate, which is 10%.

Cost as % of bond issue 4%


Annualised Cost to company is 4%

b.
Bond cash
Date flow
18-Oct-16 -103000000
15-Feb-17 5000000
15-Aug-17 5000000
15-Feb-18 5000000
15-Aug-18 5000000
15-Feb-19 5000000
15-Aug-19 5000000
15-Feb-20 5000000
15-Aug-20 5000000
15-Feb-21 5000000
15-Aug-21 5000000
15-Feb-22 5000000
15-Aug-22 5000000
15-Feb-23 5000000
15-Aug-23 5000000
15-Feb-24 5000000
15-Aug-24 5000000
15-Feb-25 5000000
15-Aug-25 5000000
15-Feb-26 5000000
15-Aug-26 105000000

YTM 10.03%
which is 10%.
Coupon Rate 11.75%
Coupon Payments (semi
annual) 58.75
Issue Date 15-May-85
Maturity Date 15-Nov-14
Callable Date 15-Nov-09
Bond Price on (23/11/05) 1356.20
Face Value 1000.00

a. B.
Current date 23-Jan-05 Date Cash Flow
Previous interest payment dat 15-Nov-04 23-Jan-05 -1333.80
Next interest payment date 15-May-05 15-May-05 58.75
15-Nov-05 58.75
Days since last coupon date 69 15-May-06 58.75
Days between last coupon
date and next coupon date 181 15-Nov-06 58.75
15-May-07 58.75
Accured Interest 22.39640883978 15-Nov-07 58.75
15-May-08 58.75
Date Bond Cash Flow 15-Nov-08 58.75
23-Jan-05 -1333.80 15-May-09 58.75
15-May-05 58.75 15-Nov-09 58.75
15-Nov-05 58.75
15-May-06 58.75 YTC -24.98%
15-Nov-06 58.75
15-May-07 58.75
15-Nov-07 58.75
15-May-08 58.75
15-Nov-08 58.75
15-May-09 58.75
15-Nov-09 58.75
15-May-10 58.75
15-Nov-10 58.75
15-May-11 58.75
15-Nov-11 58.75
15-May-12 58.75
15-Nov-12 58.75
15-May-13 58.75
15-Nov-13 58.75
15-May-14 58.75
15-Nov-14 1058.75

YTM 7.38%

You might also like