Principles of Finance

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Using Spreadsheets to Solve Bond Problems

LEARNING OUTCOMES
  • Demonstrate bond valuations using Excel.
  • Demonstrate bond yield calculations using Excel.

Calculating the Price (Present Value) of a Bond

The following examples illustrate how Microsoft Excel can be used to calculate common bond problems. Please be sure to refer to the chapters on the time value of money for examples of using spreadsheets to solve present value problems, as these same concepts are also used in solving bond problems.

You can use the following steps in Excel to determine the price or present value of a coupon bond. Suppose that a bond has a par or face value of $1,000, pays coupons semiannually at a 4% annual rate, and matures in 15 years. We can assume a YTM rate of 5%.

  1. First, select Formulas from the Excel upper menu bar, and from the dialog box, select PV (see Figure 10.11).
    A screenshot of excel shows function formulas from the upper menu bar. PV is selected from the function drop down menu.
    Figure 10.11 Using Excel to Enter a PV (Present Value) Function
     
  2. When the PV function is selected, another dialog box will appear (see Figure 10.12). It is here that the function variables, or arguments, will be entered. It is preferable to use cell addresses to refer to these arguments so that the spreadsheet can be easily used again if inputs/arguments change.
    A screenshot of a function arguments window, where parameters to calculate the present value function are required to be entered. The parameters to enter are rate, Nper, pmt, Fv, and Type.
    Figure 10.12 Function Arguments Dialog Box
     
  3. Enter the function inputs or arguments (see Figure 10.13). We refer to the cell addresses as per our example spreadsheet.
    A screenshot of the Function arguments window, where parameters to calculate the present value function are entered according to the data in the Excel sheet.
    Figure 10.13 Completed Data Entry Menu

    Note that the result, the price or present value, will appear in the bottom left section of the Function Arguments box once the arguments are entered. It will appear as a negative value because of the sign convention and because the bond face value in cell F4 was entered as a positive value.

Calculating the Yield to Maturity (Interest Rate) of a Bond

Use the following steps in Excel to determine the YTM (interest rate) of a bond. Assume that you want to find the YTM of a $1,000, 3.5% bond with annual coupon payments that is selling for $675.00 and will mature in 12 years.

  1. First, select Formulas from the Excel upper menu bar, and from the dialog box, select Rate (see Figure 10.14).
    A screenshot of the Insert Function window, where the Rate function is selected.
    Figure 10.14 Using Excel to Enter a Rate Function
     
  2. After the dialog box appears, enter the variables or arguments. As with our earlier example, we will use the preferred method of identifying the arguments with cell addresses (see Figure 10.15).
    A screenshot of the Function arguments window, where parameters to calculate the rate value function are entered according to the data in the Excel sheet.
    Figure 10.15 Completed Data Entry Menu
     
  3. Again, after all arguments are entered through their correct cell references, the answer will appear in the lower left corner of the box. Once satisfied with the result, you can hit Enter to insert this final calculated value in your spreadsheet. This has been set up in this sheet in cell H10.

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