Capital Markets, Bonds

any cashflow C has a present value equal to

, 1 i N guiven a series of cashflows neg and pos, the net present value of whole series is the sum of all the present values.

The price in bond mkt is the present value now of all the futures cashflow which arise from holding the bond,

Price is expressed as the price for 100 units of the bond.

A general theoretical all

in price P for straightforward bond is given by :

P
k

Ck
dk
n

i n

year

Where : Ck is the kth cashflow arising dk is the number of days until Ck i yield on the basis of n payments per year

then the

all in price of a bond equals the NPV of its future cashflows.

Because the price is the net present value the greater the yield used to discount the cashflows the lower the price.

Differences with medium term CDs , coupon pay ona CD is calculated on the basis of th exact number days between issue and maturity. with bonds coupons paid periodically are paid as fixed round amounts, if a 10 coupon bond pays semianually, exactly 5 will be paid each half year regardles of exact of days involved.

it is assumed that the time periods between coupons are also round periods Bonds assume commpound discounting to a present value, instead of The CD simple basis discounting.

P 1
1
1 1
i n N

100
i n W

R
n 1

1 1
i n

1 1
i n

Bonds Pricing.nb

where : R annual cooupon rate paid n times per year W fraction of coupon period between purchase and nxt coupon to receive days purchase nxt oupon total days coupon coupon

N number of coupon payments not yet paid i yield per anum This formula is the one generally used by the market with its simple assumptions : N represents the "round" periods, W the round fraction of a coupon period .... there can be some adjustment due to unexpected situations, but the market approach is still generally to calculate the total price as the NPV assuming precisely regular coupon periods

Anyway is possible to calculate price without making these assumpitons , using the formula of compounded present value :

P
k

Ck
dk
n

i n

year

with the exact time periods between cashflows and consistent day year basis for all type of bonds of short maturity , the reslust can be significantly different from the conventional formula and clearly more satisfactory for comparing different bonds.

This price is the dirty , and representes total cash paid by the buyer. But the seller expects to receive "accrued" coupon on the bond is the coupon which the seller of the bond has "earned" so far by holding the bond since last coupon date. he insist the buyer to pay him this portion. the buyer will pay no more thant the NPV of all the future cashflows therefore the total price paid is the dirty price but this is considered as two ammounts : Clean price and the accrued coupon.

Price quoted in mkt is clean price which is equal to dirty price minus accrued coupon called alse accrued interest.

A bond Pays 9% coupon anually . maturity is on 12 Aug 2014. current mkt yield for the bond is 8%. interest caltulated on a 30/360 basis: accrued coupon? clean p ? dirty p? for settlement 9 june 2009 8.122008 enter 6.092009 DYS x y = 297

accrued coupon

A bond Pays 9% coupon anually . maturity is on 12 Aug 2014. current mkt yield for the bond is 8%. interest caltulated on a 30/360 basis: accrued coupon? clean p ? dirty p? for settlement 9 june 2009 8.122008 enter 6.092009 DYS x y = 297
Bonds Pricing.nb 3

accrued coupon
In[2]:=

297 9. 360

Out[2]=

7.425

9 jun to 14 aug 2009 are 63 days act 360

100
63

0.09 1 1

1.08 360