Fv yrs coupon

100 3 yrs 6% 100 3 6%

coupon
0 0
1 6 0.04 5.7692308 1 6 0.02
2 6 0.04 5.5473373 2 6 2%
3 106 0.04 94.233614 3 106 2%
trading at premium 105.55018 premium

0 Q. 3
1 6 0.08 5.5555556 Fv yrs coupon
2 6 0.08 5.1440329 1000 3 6%
3 106 0.08 84.146218
trading at discount 94.845806 N cf df
1 30 0.015
0 2 30 0.015
1 6 0.06 5.6603774 3 30 0.015
2 6 0.06 5.3399786 4 30 0.015
3 106 0.06 88.999644 5 30 0.015
trading at par 100 6 1030 0.015
premium

senario coupon yield

1 6% 3%
2 6% 6%
3 6% 12%

N cf df
0 0.015
0 0 0.015
0 0 0.015
0 0 0.015
0 0 0.015
0 1000 0.015
premium

Fv yrs coupon
100 3 5%

N cf df
0 0 0.03
1 2.5 0.03
2 2.5 0.03
3 2.5 0.03
4 2.5 0.03
5 102.5 0.03

N cf df

1 2.75 0.03
2 2.75 0.03
3 2.75 0.03
4 2.75 0.03
5 102.75 0.03
 yield relationship
2% coupon yield price

5.88235294118
5.76701268743
99.886167462
111.535533091

yield Fv yrs coupon yield Fv yrs

3% 1000 3 0.06 0.06 1000 3

pv N cf df pv N cf
29.5566502463 1 30 0.03 29.126213592 1 30
29.1198524594 2 30 0.03 28.277877274 2 30
28.6895098122 3 30 0.03 27.454249781 3 30
28.2655269086 4 30 0.03 26.654611437 4 30
27.8478097622 5 30 0.03 25.878263532 5 30
941.978458293 6 1030 0.03 862.60878438 6 1030
1085.45780748 par 1000

price (6p left) price (5p left)

1085.46 1071.74 1057.82 1043.68 1029.34 1014.78 1000
1000
852.48027022 852.48 896.63 919.81 945 971.7 1000

pv N cf
0 30
0 2 30
0 3 30
0 4 30
0 5 30
1000 6 0
1000.00

yield Fv yrs coupon yield

6% 1000 5 0.075 0.081

pv N cf df pv
0
2.42718446602 0 0 0.075 0
2.35648977283 0 0 0.075 0
2.28785414838 1 75 0.075 69.76744186
2.22121761979 2 75 0.075 64.899945917
88.4174003994 3 75 0.075 60.372042713
97.7101464064 4 75 0.075 56.160039733
5 1075 0.075 748.80052978
pv 1000

2.66990291262 Fv yrs coupon yield

2.59213875012 1000 5 0.075 0.081
2.51663956322
2.44333938177 N cf df pv
88.6330525955 1 75 0.081 69.380203515
98.8550732032 2 75 0.081 64.181501864
3 75 0.081 69.380203515
4 75 0.081 64.181501864
5 75 0.081 59.37234215

326.49575291
 coupon yield
0.06 0.12

df pv
0.06 28.301887
0.06 26.699893
0.06 25.188578
0.06 23.76281
0.06 22.417745
0.06 726.10936
discount 852.48027

why buy?
loss of 3%

profit of 6%

df pv
0.06 30
0.06 26.699893
0.06 25.188578
0.06 23.76281
0.06 22.417745
0.06 0
premium 128.06903
fv 100
c 10%
n 4y
f ann
ytm 0.10
method 1 method 2
t CF pv t*pv Weights
1 10 9.09 9.09 9.09%
2 10 8.26 16.53 8.26%
3 10 7.51 22.54 7.51%
4 110 75.13 300.53 75.13%
price 100 348.69

initail investment 3.49

back in 3.49 years mac. Duration

fv 100
c 9%
n 5y
f ann
ytm 0.08

t CF Pv t*pv
1 9 8.33 8.33
2 9 7.72 15.43
3 9 7.14 21.43
4 9 6.62 26.46
5 109 74.18 370.92
price 103.99 442.58
mac. Duration 4.26
mod 3.94
3.92

Working model
fv 100
c 8%
n
f ann
ytm 8%

t CF Pv t*pv
1 8 7.41 7.41
2 8 6.86 13.72
3 8 6.35 19.05
 4 8 5.88 23.52
5 8 5.44 27.22
6 8 5.04 30.25
7 108 63.02 441.12
price 100.00 562.29

5.62
mac. Duration
mod 5.21
mod 5.17

CF
1 8
2 8
3 108

Bond A N 0 1 2
CF -105.3 8 8
5.3 eating away
otherwise return
would have been
8

Bond B N 0 1 2
CF -94.65 4 4
% got increased during this period
wt. avg. of time
0.09
0.17
0.23
3.01
3.49

skewed more towards 4

weights of cash flows,

wt. wt. avg. of time
0.08 0.08
0.07 0.15
0.07 0.21
0.06 0.25
0.71 3.57
4.26
years to break even

weights of cash flows,

wt. wt. avg. of time
0.07 0.07
0.07 0.14
0.06 0.19
 0.06 0.24
0.05 0.27
0.05 0.30
0.63 4.41
5.62
years to break
even

PV
7.54716981132
7.11997152011
90.6788825675
105.35

3
108 6%

3
104 6%
sed during this period
 Working model
fv 100
c 0%
n 7 ys
f ann
ytm 6.0%

t CF Pv t*pv
1 0 0.00 0.00
2 0 0.00 0.00
3 0 0.00 0.00
4 0 0.00 0.00
5 0 0.00 0.00
6 0 0.00 0.00
7 100 66.51 465.54
price 66.51 465.54
mac. Duration 7.00
mod 6.60

Yield changes
Yield Price mod
7 105.39 5.39 5.29 1.54
8 100.00 5.21
Bond A 9 94.97 -5.03 5.12 -1.73

7.5 107.94 5.25 5.16 1.57

8.5 102.56 5.08
Bond B 9.5 97.53 -4.90 4.99 -1.77

6.5 109.98 6.58 6.44 2.06

7.50 103.19 6.31
Bond C 8.5 96.94 -6.06 6.18 -2.06

6 59.19 8.83 8.49 0.95

7 54.39 8.41
Bond D 8 50.02 -8.03 8.33 -0.95

Bonds (mod % change) Rise/ Fall Yield changes coupon changes

1% 1.54 1.73
Bond A -1% -1.73 -1.73
1% 1.57 1.57
Bond B -1% -1.77 -1.57
1% 2.06 2.22
Bond C -1% -2.06 -1.90
1% 0.95 6.78
Bond D -1% -0.95 -5.23
Bonds (Price % change) Rise/ Fall Yield changes coupon changes
1% 5.39 -5.21
Bond 1 -1% -5.03 5.21
1% 5.25 -4.99
Bond 2 -1% -4.90 4.99
1% 6.58 -6.18
Bond 3 -1% -6.06 6.18
1% 8.83 -11.97
Bond 4 -1% -8.03 11.99
 Working model
fv 100
c 0%
n 9 ys
f ann
ytm 7.0%

wt. wt. avg. of time t

0.00 0.00 1
0.00 0.00 2
0.00 0.00 3
0.00 0.00 4
0.00 0.00 5
0.00 0.00 6
1.00 7.00 7
7.00 8
9
10

coupon changes
coupon Price mod
7 94.79 -5.21 5.3 1.73
8 100.00 5.21
Bond A 9 105.21 5.21 5.12 -1.73

8 97.44 -4.99 5.16 1.57

9 102.56 5.08
Bond B 10 107.68 4.99 5 -1.57

7 96.81 -6.18 6.45 2.22

8.00 103.19 6.31
Bond C 9 109.57 6.18 6.19 -1.90

-1 47.88 -11.97 8.98 6.78

0 54.39 8.41
Bond D 1 60.91 11.99 7.97 -5.23

maturity changes
-11.32
10.36
-11.02
10.04
-8.08
7.61
-11.06
11.18
maturity changes
0.00
0.00
-0.27
0.25
-0.25
0.23
7.00
-6.55
 Working model
fv 100
c 8%
n 7 ys
f ann
ytm 7%

CF Pv t*pv wt. wt. avg. of time t CF

0 0.00 0.00 0.00 0.00 1 0
0 0.00 0.00 0.00 0.00 2 0
0 0.00 0.00 0.00 0.00 3 0
0 0.00 0.00 0.00 0.00 4 0
0 0.00 0.00 0.00 0.00 5 0
0 0.00 0.00 0.00 0.00 6 0
0 0.00 0.00 0.00 0.00 7 100
0 0.00 0.00 0.00 0.00 price
0 0.00 0.00 0.00 0.00
100 50.83 508.35 1.00 10.00
price 50.83 508.35 1.00 10.00
mac. Durat 10.00
mod 9.35
maturity changes
Maturity Price mod
6 100 0.00 4.62 -11.32
7 100.00 5.21
Bond A 8 100 0.00 5.75 10.36

6 102.28 -0.27 4.52 -11.02

7 102.56 5.08
Bond B 8 102.82 0.25 5.59 10.04

8 102.93 -0.25 5.8 -8.08

9.00 103.19 6.31
Bond C 10 103.43 0.23 6.79 7.61

8 58.2 7.00 7.48 -11.06

9 54.39 8.41
Bond D 10 50.83 -6.55 9.35 11.18
 Pv t*pv wt. wt. avg. of time
0.00 0.00 0.00 0.00
0.00 0.00 0.00 0.00
0.00 0.00 0.00 0.00
0.00 0.00 0.00 0.00
0.00 0.00 0.00 0.00
0.00 0.00 0.00 0.00
62.27 435.92 1.23 8.58
62.27 435.92 8.58
mac. Durat 7.00
mod 8.01
spot rate
E.G. 1 yrs cf pv
fv 1000 1 60 57.142857143
c 6% 2 60 53.399786401
m 3 3 1060 865.2757495
spot rate- s1 5% price 975.81839305
s2 6%
s3 7%

E. G. 2
fv 10,000 discount all cashflows, check for p.a
m 2.5 periods cf pv
c 7% semi ann 1 350 344.82758621
s 0.5 p.a. 3% 1.50% 2 350 338.06422013
s1 pa 3.50% 1.75% 3 350 331.02834222
s 1.5 pa 3.75% 1.88% 4 350 323.34589911
s 2 pa 4% 2.00% 5 10350 9317.0838094
s 2.5 pa 4.25% 2.13% price 10654.349857
s 3 pa 4.5% 2.25%

E. G. 3
valuation of bonds using spot rates
fv 10,000
m 2.5
c 7% periods cf pv
s 0.5 p.a. 6% 3.00% 1 350 339.81
s1 pa 5.75% 2.88% 2 350 330.71
s 1.5 pa 5.50% 2.75% 3 350 322.64
s 2 pa 5% 2.63% 4 350 315.54
s 2.5 pa 5.00% 2.50% 5 10350 9147.89
s 3 pa 4.8% 2.38% price 10456.59

FORWARDS RATE
EG. 1
1.0816 5.0097% it’s a forward rate promise fixed
1.03 as of today its spot
E.G. 2
1.157625 6.0145%
1.03

1.155625 8.0023%
1.07
1.159274074 2.0236%
1.07

Bootstraping

-0.0999%
2 yr
years spot rates (forwards rate curve) for a 1 yr loan after n forward years
years curve
1 3% - - 1
2 2.90% 2.8001% - 2
3 2.80% 2.6003% 2.7001% 3
4 2.70% 2.4006% 2.5004% 4
5 2.60% 2.2010% 2.3007% 5
6 2.50% 2.0015% 2.1012% 6
7 2.40% 1.8020% 1.9017% 7
8 2.30% 1.6027% 1.7023% 8
9 2.20% 1.4035% 1.5031% 9
10 2.10% 1.2044% 1.3039%

forwards discounting
ys cf pv forwards
fv 1000 1 60 57.14
c 6% 2 60 53.91
m 3 yrs 3 1060 890.08
f1 5% price 1001.13
f2 6%
f3 7%
 Yield @ 6.92201%
yrs cf pv
1 60 56.11667
2 60 52.48468
3 1060 867.217
price 975.8184

calculate the ytm of bond

periods cf
-10654.35
1 350 2.1074%
2 350 2.1074%
3 350 2.1074%
4 350 2.1074%
5 10350 2.1074%
irr 2.1074% for 6 moths
4.2148% for 1 yr

periods cf periods
-10456.59 1
1 350 2.5167% 2
2 350 2.5167% 3
3 350 2.5167% 4
4 350 2.5167% 5
5 10350 2.5167%
irr 2.5167% for 6 moths
5.0335% for 1 yr ytm supposed to be per annum
 2 yr 3 yr 4 yr 5 yr 6 yr
spot rates (forwards rate curve) for a forward forward forward forward forward
1 yr loan after n years curve curve curve curve curve
6.50% - - - - - -
6.61% 6.7151% - - - - -
6.72% 6.9303% 6.8227% - - - -
6.82% 7.1457% 7.0379% 6.9302% - - -
6.93% 7.3611% 7.2533% 7.1455% 7.0378% - -
7.04% 7.5766% 7.4688% 7.3610% 7.2531% 7.1453% -
7.15% 7.7923% 7.6844% 7.5765% 7.4686% 7.3608% 7.2529%
7.25% 8.0080% 7.9001% 7.7922% 7.6842% 7.5763% 7.4684%
7.36% 8.2239% 8.1159% 8.0079% 7.8999% 7.7919% 7.6840%

yield -irr
rate S rates Pv spot -1001.13
s1 5.000% 57.14 60 56.62628
s2 5.499% 53.91 60 53.44225
s3 9.129% 815.62 1060 891.0583
price 926.67 6% 1001.127
IRR
2.470%
5% 57.14286
8.61% 50.86413
9.23% 813.3549
921.3618
 cf pv
350 333.23
350 317.26
350 302.05
350 287.58
10350 8096.59
price 9336.71

osed to be per annum

 years spot rates

1 3%
2 3.25%
7 yr 8 yr 9 yr
forward forward forward
curve curve curve 3 3.50%
- - - 4 3.75%
- - - 5 4.00%
- - - 6 4.25%
- - - 7 4.50%
- - - 8 4.75%
- - - 9 5.00%
- - - 10 5.25%
7.3604% - -
7.5760% 7.4680% -
(forwards (forwards rate curve) 2 yr 3 yr
rate years spot rates for a 1 yr loan after 1 forward forward
curve) for year curve curve
a 1 yr 2 yr
loan after forward
n years curve
- - 1 6.50% - - -
3.5006% - 2 6.60% 6.6901% - -
3 6.69% 6.8803% 6.7851% -
4.0018% 3.7509%
4.5036% 4.2524% 4 6.79% 7.0705% 6.9753% 6.8802%
5.0060% 4.7545% 5 6.88% 7.2608% 7.1656% 7.0704%
5.5090% 5.2572% 6 6.98% 7.4513% 7.3560% 7.2608%
6.0126% 5.7605% 7 7.07% 7.6418% 7.5465% 7.4512%
6.5168% 6.2644% 8 7.17% 7.8324% 7.7370% 7.6417%
7.0216% 6.7689% 9 7.26% 8.0230% 7.9277% 7.8323%
7.5270% 7.2740% 10 7.36% 8.2138% 8.1184% 8.0230%
 4 yr 5 yr 6 yr 7 yr 8 yr 9 yr
forward forward forward forward forward forward
curve curve curve curve curve curve

- - - - - -
- - - - - -
- - - - - -
- - - - - -
6.9752% - - - - -
7.1655% 7.0703% - - - -
7.3559% 7.2606% 7.1653% - - -
7.5464% 7.4510% 7.3557% 7.2603% - -
7.7369% 7.6415% 7.5461% 7.4508% 7.3554% -
7.9275% 7.8321% 7.7367% 7.6413% 7.5458% 7.4504%