CHAPTER 3

Pretul obligatiunilor tinand cont de rata de discount de pe piata

cupon cupon cupon+ valoare la maturitate

Valoare prezenta= 1
+ 2
+…+
(1+r ) (1+r ) (1+r ) N
Exemplu 1

Cupon

Maturitate 5 ani

Discount = 6%

a) Cupon annual 4%

4 4 4 4 104
PV = + + + + =3.774+3.560+3.358+ 3.168+ 77.715=91.575
(1.06) (1.06) (1.06) (1.06) (1.06)5
1 2 3 4

The bond price is 91.575 per 100 of par value.

b) Cupon seminanual 8%

4 4 4 4 4 +4 4 4 4 104
PV = + + + + + + + + + =108.530
(1.03) (1.03) (1.03) (1.03) (1.03) (1.03) (1.03) (1.03) (1.03) (1.03)10
1 2 3 4 5 6 7 8 9

The bond price is 108.530 per 100 of par value.

Exemplu 2

Rata= ?

Cupon = 5%

105per 100 => PV = 105

5 5 5 105
105= + + +
(1+ r) (1+r ) (1+r ) (1+r )4
1 2 3

where r = 0.03634, or 3.634%.

excel -> goal seek -> 1. Introducem fomula de mai sus pentru r =0

2. set cell -> celula cu formula pentru PV

3. To value -> valoarea care se cere la PV

4. by changing -> r
Pretul obligatiunilor tinand cont de rata de rata spot

cupon cupon cupon+valoare lamaturitate

PV = 1
+ 2
+ …+
(1+rata spot 1) (1+rata spot 2) (1+rata spot N ) N
Exemplu

Rata 1 = 2%, rata 2 = 3%, rata 3 = 4%

5 5 5+100
PV = + + =102.96
(1+0,02) (1+0.03) (1+ 0.04)3
1 2

Full price (dirty) = clean price + dobanzi acumulate

numar de zile de la ultimul cupon−data stabilita

Dobanzi acumulate ¿ × cupon
360

Pf =PV × ( 1+ r )t /T

Exemplu

Obligatiune 6% (15 iunie 2015)

Cupon semianual (19 martie si 19 septembrie)

Maturitate 2026

3 3 103
PV = 1
+ 2
+ …+ =101.6616 23 -> emis 18 iun -> primul cupon 19 sept->
(1.0290) (1.0290) (1.0290)23
23 cupoane

The present value of the bond is EUR101.6616.

• The full price on 18 June 2015 is

Pf =101.66 ×(1.0290)89 /180 =EUR 103.1088 -> 89 -> 18 iun-19sept ->94 zile – 5 = 89 zile
• The accrued interest is

89
AI = × 3=EUR 1.4833
180
• The clean/flat price is

Pc =103.1088−1.4833=EUR 101.6254

Exemplu interpolare liniara

Cupon semianual 4%

Maturitate 3 ani
 Pentru a determina ytm, gaseste alte 2 obligatiuni:

1. 2 ani, ytm = 3.8035

2. 5 ani, ytm = 4.1885

0.038035+ ( 3−2
5−2 )
× ( 0.041885−0.038035 )=0.039318 =YTM

Convertirea randamentelor in functie de perioada

Exemplu

YTM semianual = 4.96%

YTM quarter = ?
4
0.0496 2 APR 4
( 1+
2 ) (
= 1+
4 )
, APR 4 =0.0493

Floating rate notes (FRN)

( Indicele ratei de referinta anual+ cotamarginala anuala ) × valoarea la maturitate ( Indicele ratei de refe
periodicitate FRN
PV = +
Indicele ratei de referinta anual+ discount marginal anual 1 Indicel
1+( periodicitate FRN ) 1+(
…
( Indicele ratei de referinta anual+ cotamarginala anuala ) × valoarea la maturitate
+ valoarea la maturitate
periodicitate FRN
Indicele ratei de referinta anual + discount marginal anual N
( 1+
periodicitate FRN )
FRN pe 5 ani

Plateste libor 3M+0.75% trimestrial

Libor 3M = 1.10%

Pretul floater = 95.50 per 100

Calculati discountul marginal

( 0.011+ 0.0075 ) × 100 ( 0.011+ 0.0075 ) × 100 ( 0.011+ 0.0075 ) × 100

+ + 100
4 4 4
95.50 ¿ + +¿…
0.011+ DM 1 0.011+ DM 2 0.011+ DM 20
(1+
4 ) 1+( 4 ) (
1+
4 )
Solving for DM, DM = 1.718%, or 171.8 bps EXCEL GOAL SEEK
Example. Calculate the 2y4y if the two-year spot rate is 4.5% and the four-year spot rate is 5%,
assuming annual compounding:

(1+0.05)4
(1+ IFR2,2 )2= IFR2,2 =5.50 %
(1+0.045)2

CHAPTER 4
SOURCES OF RETURN
Example: An investor purchases a 10-year, 8% annual coupon bond at $85.503075 per $100 of par
value and holds it to maturity. The bond’s yield to maturity is 10.40%. Show the sources of return:

Bondholder receives 1) Coupon payments 10 × $8 = $80; 2) Par value at maturity $100; 3)

Reinvestment income from coupons (at 10.40%).

[ 8 × ( 1.1040 )9 ]+[ 8 × ( 1.1040 )8 ]+[ 8 × ( 1.1040 )7 ]+ [ 8× ( 1.1040 )6 ]+[ 8 × ( 1.1040 )5 ]+

[ 8 × ( 1.1040 )4 ] + [ 8 × ( 1.1040 )3 ]+[ 8 × ( 1.1040 )2 ]+[ 8 × ( 1.1040 )1 ] +8=$ 129.970678
$129.970678 = Future value of the coupons on the bond’s maturity date

$49.970678 = Interest on reinvested coupons ($129.970678 – $80)

$229.970678 = Total return ($129.970678 + $100)

1
229.970678
Realized rate of return: r = ( 85.503075 ) 10
−1=0.1040∨10.40 %.

Example: An investor purchases a 10-year, 8% annual coupon bond at $85.503075 and sells it in four
years. The bond’s yield-to-maturity goes up from 10.40% to 11.40% straight after the purchase.
Show the sources of return:

Bondholder receives 1) Coupon payments 4 × $8 = $32; 2) Sale price (at 11.40% YTM) $85.780408; 3)
Reinvestment income from coupons (at 11.40%).

[ 8 × ( 1.1140 )3 ]+[ 8 × ( 1.1140 )2 ]+[ 8 × ( 1.1140 )1 ]+ 8=$ 3 7.899724

$37.899724 = Future value of the reinvested coupons

$5.899724 = Interest on reinvested coupons ($37.899724 – $32)

$123.680132 = Total return ($37.899724 + $85.780408)

 123.680132 14
Realized rate of return: r = ( 85.503075 )
−1=0.0967∨9.67 % .

The Macaulay duration (D) formula (for the period)

t t t

[ ]
(1− ) × PMT (2− ) × PMT ( N − ) ×( PMT + FV )
T T T
1−t / T
+ 2−t / T
+…+
(1+r ) (1+ r) (1+r ) N−t /T
D=
PMT PMT PMT + FV
1−t /T
+ 2−t /T
+ …+
(1+r ) (1+r ) (1+ r) N−t / T

where t is the number of days from the last coupon payment to the settlement date; T is the
number of days in the coupon period; PMT is the coupon payment per period; FV is par value; r is
YTM/discount rate per period; and N is the number of coupon periods to maturity

1+ r 1+r + [ N × ( c−r ) ] t
D=
{ r
− N
c × [ (1+r ) −1 ] +r }(
−
T )
where c is the coupon rate per period.

Example: A 6% annual payment bond matures on 14 February 2022 and is purchased for settlement
on 11 April 2014. The YTM is 4%. Calculate the bond’s Macaulay duration (actual/actual convention):

Period Time to CF (cash PV of CF Time-Weighted PV

Receipt flow) of CF

1 309/365 = 6 6/(1 + 0.04)^0.8466 0.8466 × 5.80 =

0.8466 = 5.80 4.91

2 1.8466 6 5.58 10.31

3 2.8466 6 5.37 15.28

4 3.8466 6 5.16 19.85

5 4.8466 6 4.96 24.05

6 5.8466 106 84.28 492.74

111.15 567.13

D = 567.13/111.15 = 5.1 years

 1+0.04 1+ 0.04+ [ 6 × ( 0.06−0.04 ) ] 56 →14 FEB−11 APR
D= − −
0.04 0.06 × [ ( 1+ 0.04 )6 −1 ]+ 0.04 365

¿ 5.10 years.

An alternative approach is to estimate the approximate modified duration (AMD) directly:

AMD=¿ ¿
where PV0 is the price of the bond at the current yield, PV+ is the price of the bond if the yield
increases (by ΔYield), and PV– is the price of the bond if the yield decreases (by ΔYield).

Example: Consider a 6% semiannual coupon paying bond with 4 years to maturity currently priced at
par (YTM = 6%).

If the YTM increases/decreases by annualized 20 bps, the price raises/decreases to 99.301 and
100.705, respectively:

( 100.705 )−(99.301)
AMD= =3.51 years.
2 ×( 0.002)×(100)
The approximate Macaulay duration (AD) is calculated from the approximate modified duration
(AMD).

AD= AMD×(1+r )
AD=3.51× ( 1+0.03 )=3.615 years
Where r = 3% = $6 (annual coupon payment per $100)/2.

Money duration (MoneyDur) is calculated as follows:

Mon ey D ur= AMD × PV Full

The estimated change in the bond price in currency units is calculated by the following:

∆ PV Full ≈−MonD × ∆ Yield

Example: Consider a 6% semiannual coupon bond with a current price of HKD100.940423 per
HKD100 of par value and an annual modified duration of 6.1268 years. Suppose a life insurance
company has a position in the bond of HKD100 million, and the market value of the investment is
HKD100,940,423. Calculate the money duration and change in value of position as a result of a 100
bps decline in YTM.

• Money duration (MoneyDur) is calculated as

Mon ey D ur=6.1268 × HKD 100,940,423=HK D 618,441,785 .

• The estimated change in the bond price in HKD is
∆ PV Full ≈−HKD 618,441,785 ×0.01=−HK D6,184,418 .
The price value of a basis point (PVBP) is calculated as follows:

PVBP=¿ ¿ ¿
Example: Assume a T-note is priced at 99.561006 and yields 0.723368%. An increase and decrease
in 1 bp results in the price changing to 99.512707 and 99.609333, respectively. Calculate the PVBP:

99.609333−99.512707
PVBP= =0.04831 .
2
convexity statistic for the bond

1
% ∆ PV Full ≈ (−AMD × ∆ Y ield ) + [ 2
× Conv ×(∆ Y ield)2 ]
Example: A 6% annual payment bond matures on 14 February 2022 and is purchased for settlement
on 11 April 2014. The YTM is 4%. Calculate the bond’s convexity (actual/actual convention):

Perio Time to CF PV of CF t^2+t (t^2+t) × PV of CF

d Receipt

1 0.8466 6 5.80 1.56 9.07

2 1.8466 6 5.58 5.26 29.34

3 2.8466 6 5.37 10.95 58.76

4 3.8466 6 5.16 18.64 96.19

5 4.8466 6 4.96 28.34 140.58

6 5.8466 106 84.28 40.03 3373.63

111.15 3707.57

Conv = 1/(1 + 0.04)^2 × 3707.57/111.15 = 30.84

The approximate convexity is calculated by the following:

AConv=¿ ¿ ¿
effective convexity

EffConv=¿¿
Example: Consider a 6% semiannual coupon paying bond with 4 years to maturity that is currently
priced at par (YTM = 6%) and has an AMD of 3.51 years. If the YTM increases/ decreases by 20 bps,
the price raises/decreases to 99.301 and 100.705, respectively. Calculate AConv and the effect of a
50 bps change in yield on the bond price:

100.705+99.301− (2 ×100 )
AConv= =14.81
(0.002)2 ×100
1
% ∆ PV Full ≈−3.51× 0.005+ × 14.81× ( 0.005 )2=1.77 % , including a 0.0185% convexity
2
adjustment.
CHAPTER 5
A convenient measure of credit risk is expected loss.

Expected loss ,∨E (loss)=Default probability × Loss severity givendefault ( LGD)

LGD=1−Recovery rate
Example. Assume the probability of default on the bond is 10% and the average recovery rate, if
defaulted, is 40%. Calculate the expected loss:

E ( loss )=0.1× (1−0.4 )=0.06 ,∨6 % .