Compounding duration

Mature
Coupon
Int rate (Yield to maturity YTM)
Date
Amount
Date of settlement

Semi-annually
9-Jul-26
0.00%
7.96%
9-Jan-13
100

Year

Cashflow
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
5.5
6
6.5
7
7.5
8
8.5
9
9.5
10
10.5
11
11.5
12
12.5
13
13.5

Say I buy this bond from the owner 3 months late

Using fn
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
100

Cashflow
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
34.8622

Price
34.8622
34.86222

9-Apr-14

Year
0.25
0.75
1.25
1.75
2.25
2.75
3.25
3.75
4.25
4.75
5.25
5.75
6.25
6.75
7.25
7.75
8.25
8.75
9.25
9.75
10.25
10.75
11.25
11.75
12.25
12.75
13.25

Say I buy this bond from the owner 3 months later

Price
35.5492
Cashflow

Cashflow
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
100

0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
0.0000
35.5492

Accrued interest
Clean price (Quoted price )
Dirty price (Settlement price)
Not WYSIWYG

Conventions
- dirty / clean price
- compounding semi annually
- 30/360 convention (If all months have 30 days, year has 360 days)
- clean plus actual interest charged

Govt of India bond should be the most risk free

SBI should also be significantly risk free
Govt of India bond is for wholesale market

102.98
35.55

Zero coupon bond

Maturity

yield rate is interest rate

Zero yield
1
2
3
4

4 year coupon bond

Year
1
2
3
4

Zero price
per rupee

3.5%
4.0%
4.2%
4.4%

0.9662
0.9246
0.8839
0.8418

6% coupon
Cash flow PV @ Zero yield
6
5.797101
6
5.547337
6
5.303323
106
89.228557
105.876319

All 4 year bonds are not the same

One at 4.4, another at 4.367
There is only one 4 year zero interest bond

Zero coupon bond

Maturity
1
2
3
4
4 year coupon bond
Year
1
2
3
4

- Same interest rate across years

Zero yield Zero price
per rupee
4.367%
0.9582
4.367%
0.9181
4.367%
0.8796
4.367%
0.8428
6% coupon
Cash flow PV @ YTM
Error
6
5.748938
-0.048
6
5.508381
-0.039
6
5.277890
-0.025
106
89.341110
0.113
105.876320
0.000
Error

0.00

coupon rate (price)

Zero coupon bond

Maturity

Zero yield
1
2
3
4

4 year coupon bond

Year
1
2
3
4

Zero price
per rupee

3.5%
4.0%
4.2%
4.4%

0.9662
0.9246
0.8839
0.8418

6% coupon
Cash flow PV @ Zero yield
6
5.797101
6
5.547337
6
5.303323
106
89.228557
105.876319

All 4 year bonds are not the same

One at 4.4, another at 4.367
There is only one 4 year zero interest bond

Rate from Yr 1 to Yr 2 (Forward rate)

3.50%
4.50%
4.60%
5.00%

yield rate is interest rate

Zero coupon bond

Maturity

103.5%
104.5%
104.6%
105.0%
Discount rate

1
2
3
4
118.80%
84.18%

4 year coupon bond

Year
1
2
3
4

- Same interest rate across years

Zero yield Zero price
per rupee
4.367%
0.9582
4.367%
0.9181
4.367%
0.8796
4.367%
0.8428
6% coupon
Cash flow PV @ YTM
6
5.748938
6
5.508381
6
5.277890
106
89.341110
105.876320
Error

Risk that interest rate may change

0.00

est rate across years

coupon rate (price)

Error
-0.048
-0.039
-0.025
0.113
0.000

Risk that interest rate may change

8% change

Zero coupon bonds annual compounding

Maturity

Original Price
8%
1
92.59
2
85.73
3
79.38

Fall in rates
Fall in rates t/(1+r)
7% % Change
8%
93.46
0.93% 0.925926
87.34
1.88% 1.851852
81.63
2.83% 2.777778
For zero coupon, t/(1+r) is enough
Estimating bond price for small changes in interest rates
.25 to 1%

Maturity

Original Price
8%
1
92.59
2
85.73
3
79.38
Discount rate

3 year bond with 10% coupon

Year

Cash flow
1
2
3

Fall in rates
Fall in rates t/(1+r)
7% % Change
8%
93.46
0.93% 0.925926
87.34
1.88% 1.851852
81.63
2.83% 2.777778
8%

Original price
10
9.26
10
8.57
110
87.32
105.15

For coupon, we need weighted average of x% higher and x% lo

1%

Fall in rates t/(1+r)

prediction

7%

9%

Increase in rate
9% % Change
91.74
-0.92%
84.17
-1.83%
77.22
-2.73%

Fall in rates
1% % Change
99.01
6.93%
98.03
14.34%
97.06
22.27%

nd price for small changes in interest rates

For quick risk assessment

Fall in rates t/(1+r)

prediction

Fall in rates
1% % Change
99.01
6.93%
98.03
14.34%
97.06
22.27%

Increase in rate
7% % Change
93.24
0.70%
86.94
1.40%
81.06
2.11%

0.93
185.19
277.78
463.89

e need weighted average of x% higher and x% lower

1
2
3

9.26
8.57
87.32

9.26
17.14
261.96