1.

Regular Coupon Bond-Annual Coupon

1A.Definitions
Maturity 5 years
Coupon 8% per annum
FV 1000 rupees
Frequency 1 times a year
8.00% per annum

1B.Cash Flow & Value

Period CF PV_CF
1 80 74.0741
2 80 68.5871
3 80 63.5066
4 80 58.8024
5 80 54.4467
5 1000 680.5832
Coupons are asumed to be invested at the same rate
1000.00

1C.Formula to compute at one step

( 1+i )n −1
Maturity
Coupon
FV
Frequency
8%
5

1000
1
years
per annum
rupees
times a year
P=C
[
i ( 1+i )n
+
M
( 1+i )n ]
YTM 8.00% per annum
Concept of Required Yield

Price P = 1000

2. Regular Coupon Bond-Bi-Annual Coupon

2A.Definitions
Maturity 5 years
Coupon 8% per annum
FV 1000 rupees
Frequency 2 times a year
YTM 9.00% per annum
YTM' 4.50% per half-year

2B.Cash Flow & Value

Period CF PV_CF
1 40 38.2775
2 40 36.6292
3 40 35.0519
4 40 33.5425
5 40 32.0980
 6 40 30.7158
7 40 29.3931
8 40 28.1274
9 40 26.9162
10 40 25.7571
10 1000 643.9277

1400 960.44

2C.Formula to compute at one step

Maturity 5 years
Coupon 8.00% per annum
FV 1000.00 rupees
( 1+i )n −1
Frequency
YTM
YTM'
9.00%
4.50%
2 times a year
per annum
per half-year
P=C
[
i ( 1+i )
n
+
M
( 1+i )n ]
C 40
i 4.50% The same formula is used, but
n 10 the computations of C, n and i are changed
M 1000

P= 960.44 (Computed using formula)

3. Price-Yield Relationship (Derive it by changing the i values)

Maturity 5 years
Coupon 8.00% per annum
FV 1000.00 rupees
Frequency 2 times a year
YTM 9.00% per annum
YTM' 4.50% per half-year

C 40
i 4.50%
n 10
M 1000.00

( 1+i )n −1
P=

Yield
960.44

Price
P=C
[
i ( 1+i )n
+
M
( 1+i )n ]
6.00% 1085.30
6.10% 1080.83
6.20% 1076.38
6.30% 1071.95
 6.40% 1067.55
6.50% 1063.17
6.60% 1058.81
6.70% 1054.47
6.80% 1050.15
6.90% 1045.86
7.00% 1041.58
7.10% 1037.33 Price-Yield Relationship
7.20% 1033.10
7.30% 1028.89 1090
7.40% 1024.70 1070
7.50% 1020.53
1050
7.60% 1016.38
7.70% 1012.26 1030
7.80% 1008.15 1010
7.90% 1004.07
8.00% 1000.00 990
8.10% 995.95 970
8.20% 991.93
950
8.30% 987.92
8.40% 983.94 930
8.50% 979.97 5.50% 6.50% 7.50% 8.50% 9.50%
8.60% 976.03
8.70% 972.10
8.80% 968.19
8.90% 964.31
9.00% 960.44
9.10% 956.59
9.20% 952.76
9.30% 948.94
9.40% 945.15
9.50% 941.38
9.60% 937.62
9.70% 933.88

4. YTM involves Re-Investment of Coupon

Consider the bond with following features:

Maturity 18 years
Coupon 6% per annum
FV 1000 rupees
Frequency 2 times a year
YTM 9.50% per annum
YTM' 4.75% (YTM/2) per half-year

Half-Year CF PV-CF
Period
1 30 28.64
 2 30 27.34 =D151*(1+D$146)^C151
3 30 26.10 =CF*(1+YTM')^n
4 30 24.92
5 30 23.79
6 30 22.71
7 30 21.68
8 30 20.70
9 30 19.76
10 30 18.86
11 30 18.01
12 30 17.19
13 30 16.41
14 30 15.67
15 30 14.96
16 30 14.28
17 30 13.63
18 30 13.01
19 30 12.42
20 30 11.86
21 30 11.32
22 30 10.81
23 30 10.32
24 30 9.85
25 30 9.40
26 30 8.98
27 30 8.57
28 30 8.18
29 30 7.81
30 30 7.46
31 30 7.12
32 30 6.80
33 30 6.49
34 30 6.19
35 30 5.91
36 30 5.64
36 1000 188.13

2080 700.89

Suppose, you invest Rs. 700.89 in a bank that pays 4.75% per half annum.

Amount at the end of 18 years = 3725.59 =700.89*(1+0.0475)^36

Above bond has an YTM of 9.50% per annum or 4.75% per half anum, and
is selling at Rs. 700.89

Thus buying the bond is same as investing in the bank in above terms.
 But the bond gives you a total of Rs. 2080 in 18 years (30*36 + 1*1000)

How, then, will you make Rs. 3725.59 at the end of 18 years?

Answer - by re-investing the coupon at the YTM.

5. Yield to Call

An 18-year 6% bond is selling at Rs. 700.89. The bond is first callable in 5 years
at Rs. 1030. Compute the YTM and the Yield-to-First-Call.

We first find the YTM (assuming the bond is held until 18 years, and not called).
(By trial and error or by Goalseek).

Maturity 18 years
Coupon 6% per annum
FV 1000 rupees
Frequency 2 times a year
( 1+i )n −1
[ ]
YTM 9.50% per annum
M
YTM' 4.75% per half-year P=C n
+
i ( 1+i ) ( 1+i )n
Price = 700.8895

Thus, the YTM is 9.50% per annum.

Now, to compute YTC (first call), we note that the cash flows are:

1) Ten half-yearly coupon of Rs. 30 each

2) Rs. 1030 at the end of 5 years (or 10 half-years).

Maturity 5 years
Coupon 6% per annum
FV 1030 rupees
( 1+i )n −1
[ ]
Frequency 2 times a year
M
YTM 9.50% per annum P=C +
YTM' 4.75% per half-year i ( 1+i )n ( 1+i )n

Price = 882.08
(Use goal seek to find the YTC).
Therefore,
YTM = 9.50%
YTC(1st) = 9.50%
Issuer IDBI IDBI Retirement Bond
IDBI Floating Rate Bond
IDBI Infrastructure (Tax saving) Bond
IDBI Regular Income Bond
Date of Issue: March 2004

IDBI Retirement Bond

FV: 5000 rupees

Min No. 6 bonds
Min Invt 30000 rupees

Option-A Waiting period of 2 years; after that
investors will receive Rs. 650 per quarter
per 6 bonds for 20 quarters (5 years) ;
principal would be repaid on maturity
(at the end of 7th year from now)
Option-B Waiting period of 3 years; after that
investors will receive Rs. 1585 per quarter
per 6 bonds for 28 quarters (7 years).

YTM: 5.95168% 30000.00 YTM: 6.20731% 30000.00

Year CF PV Year CF PV
1 2.25 650 570.72 1 3.25 1585 1303.25
2 2.50 650 562.53 2 3.50 1585 1283.77
3 2.75 650 554.46 3 3.75 1585 1264.59
4 3.00 650 546.50 4 4.00 1585 1245.69
5 3.25 650 538.66 5 4.25 1585 1227.08
6 3.50 650 530.93 6 4.50 1585 1208.74
7 3.75 650 523.31 7 4.75 1585 1190.68
8 4.00 650 515.80 8 5.00 1585 1172.89
9 4.25 650 508.40 9 5.25 1585 1155.36
10 4.50 650 501.10 10 5.50 1585 1138.10
11 4.75 650 493.91 11 5.75 1585 1121.09
12 5.00 650 486.83 12 6.00 1585 1104.34
13 5.25 650 479.84 13 6.25 1585 1087.84
14 5.50 650 472.96 14 6.50 1585 1071.58
15 5.75 650 466.17 15 6.75 1585 1055.57
16 6.00 650 459.48 16 7.00 1585 1039.80
17 6.25 650 452.89 17 7.25 1585 1024.26
18 6.50 650 446.39 18 7.50 1585 1008.95
19 6.75 650 439.98 19 7.75 1585 993.88
20 7.00 30650 20449.16 20 8.00 1585 979.03
21 8.25 1585 964.40
30000.00 22 8.50 1585 949.99
23 8.75 1585 935.79
24 9.00 1585 921.81
25 9.25 1585 908.03
26 9.50 1585 894.46
27 9.75 1585 881.10
28 10.00 1585 867.93

30000.00
. 1585 per quarter

2.50%
60000 20

98,317