FIXED INCOME

SECURITIES
Definition
• Fixed Income securities are securities where the periodic returns (time
when the returns fall due) and the maturity amount of the security are
specified at the time of issue. Such securities generally form part of
the debt capital of the issuing firm. Examples are government or
corporate bonds, treasury bills, certificate of deposits etc.
Retail Investors can invest in Corporate or G-Sec
bonds in any of the following ways:-
• For G-Securities - From RBI through BSE Direct or NSE GoBid app
or RBI’s retaildirect.org.in (minimum investment Rs 10,000 through
non – competitive bid.
• Long dated Government bonds can be traded on stock exchange just like
equities.
• Almost negligible volume is traded in Govt. securities
• Corporate bonds on the other hand can be brought and sold through
exchange.
Simple Interest Rate
• Simple interest is money you can earn by initially investing some
money (the principal). A percentage (the interest) of the principal is
added to the principal, making your initial investment grow.

• Simple Interest = P*N*R (P = Principal, N = no.. of years, R = rate of Interest)

• Amount = Principal + Simple Interest
Sum

• What is the amount an investor will get on a 3 year fixed deposit of Rs

10,000 that pays 8% simple interest?

• Interest = P*N*R = 10,000 * 3 * 8% = 2400

• Amount = 10,000 + 2400 = 12,400.

Compound Interest rate
• Compound interest (or compounding interest) is interest calculated on
the initial principal, which also includes all of the accumulated interest
of previous periods of a deposit or loan. Interest can be compounded
on any given frequency schedule, from continuous to daily or
monthly or quarterly or annually. When calculating compound
interest, the number of compounding periods makes a significant
difference.
• A = P (1 + R )T*m
m
•
• Where A = amount on maturity, P = Principal, R = interest rate, m =
number of compounding in a year, T = maturity in years.
 Sum on Semi-annual compounding
Q. What is the amount an investor will get on a 3 year fixed deposit of Rs
10,000 that pays 8% interest compounded half yearly?

Amount = 10,000 + 2653.19 = Rs 12,653.19

Steps to Calculate compound interest on Scientific Calculator
1. Write the interest in decimal form and divide it by compounding
frequency.
2. Add 1 to the answer from the previous step
3. Press xy and write multiplication value of no.. Of years to maturity
with compounding frequency (m * t)
4. Multiply the principal amount with the answer .
Practice sums on Compounding with different
frequencies
Q1. What is the amount an investor will get on a 5 year fixed deposit of Rs
25,000 that pays 9.5% interest compounded half yearly?
Answer 1 = Rs 39,763.11

Q2.What is the amount an investor will get on a 7 year fixed deposit of Rs

30,000 that pays 7.65% interest compounded quarterly?

Answer 2 = Rs 50,990.586

Q3. What is the amount an investor will get on a 8 year fixed deposit of Rs
38,000 that pays 6.5% interest compounded quarterly?
Answer 3 = Rs 63,650.45
Cont..
Q4. What is the amount an investor will get on a 6.5 year fixed deposit of
Rs 40,000 that pays 12% interest compounded monthly?
Answer 4 = Rs 86,921.49

Q5. What is the amount an investor will get on a 4.5 year fixed deposit of
Rs 1,00,000 that pays 10.55% interest compounded monthly?
Answer 5 = Rs 1,60,428.056
Continuous Compounding
• Continuous compounding is the mathematical limit that compound interest can
reach if it's calculated and reinvested into an account's balance over a
theoretically infinite number of periods. It is an extreme case of compounding, as
most interest is compounded on a monthly, quarterly, or semiannual basis.
Continuous compounding introduces the concept of the natural logarithm. This is
the constant rate of growth for all naturally growing processes. It's a figure that
developed out of physics.
• The natural log is typically represented by the letter e.
• Formula = Amount = Principal * e rT

• Where e is the mathematical constant approximated as 2.718

Steps for calculating Continuous Compounding
• Step 1 : Enter the value of e which is 2.718 by typing the number on
scientific calculator.
• Step 2 : press the exponential sign XY
• Step 3 : Press open and close bracket and (enter interest rate in decimals
and multiply it with number of years)
• Step 4 : Multiply the Principal amount with answer received in Step 3.
• Consider the same investment (Rs 10,000 for 3 years). What is the
amount received on maturity if the interest rate is 8% compounded
continuously?
• P = 10,000, e = 2.718, r = 8% and T = 3
• Amount = P * erT
= 10,000 * 2.718 0.08*3 = Rs 12,712.18

What is the amount an investor will get on a 3 year fixed deposit of Rs

10,000 that pays 8% interest compounded half yearly?

Amount = 10,000 + 2653.20 = Rs 12,653.20

Sums on Continuous Compounding
• Q1. What is the amount received on maturity if the interest rate is
7.25% compounded continuously on Principal of Rs 1,50,000 for a
period of 4.5 years?
• Answer of Q1 = Rs 2,07,857.234

• Q2. What is the amount received on maturity if the interest rate is

9.5% compounded continuously on Principal of Rs 5,00,000 for a
period of 7 years?
• Answer of Q2 = Rs 9,72,178.225
Real and Nominal Interest rates
• Nominal Interest rate refers to the interest rate before taking inflation
into account. It also refers to the advertised or stated interest rate
without taking into account compounding of interest as well. It is stated
at per annum basis.
• Real Interest rate on the other hand considers inflation.
• Real interest rate = 1 + nominal interest rate -1
• 1 + Inflation rate
• Real Cash Flow = Nominal Cash Flow
• ( 1 + Inflation rate)
Sum
• Interest rate is 10% prevailing in the economy. Inflation rate is 5%. Amount
to be invested is Rs 10,000 for a period of 1 year.. How much will be
Nominal Interest rate, nominal cash flow, real interest rate and real cash
flow?
• Nominal Interest rate = 10%
• Real Interest rate = 1 + 0.10 - 1 = 0.0476 * 100 = 4.76%
• 1 + 0.05

• Nominal Cash flow = 10,000*10% +10000 = 11000

• Real Cash flow = 11,000 = Rs 10,476.

• 1.05
• Interest rate is 15% prevailing in the economy. Inflation rate is 6%.
Amount to be invested is Rs 50,000 for a period of 1 year.. How much
will be Nominal Interest rate, nominal cash flow, real interest rate and
real cash flow?

•Nominal Interest rate = 15%

•Real Interest rate = 8.49%
•Nominal Cash Flow = Rs 57,500
•Real Cash flow = Rs 54,245
BOND VALUATION
 BSE – DEBT SEGMENT
Coupon Maturity LTP
Security Code Issuer name
rate Date
• Kumar Agro 10% Dec 2023 • 65.8333
• 1000KAPPL23
products Pvt ltd
• LT Infra Debt 7.95% Dec 2035 • 106.9000
• 795LTID35
Fund Limited

Sept 2024 • 99.5844

• 570TCHFL24 • Tata Capital 5.7%
Housing Finance
Ltd

• 772GOI2055 • Government of
India 7.72% 2055 • 110.9800

• 872ANDHRA26 • Government of
8.72% 2026 • 111.2457
Andhra Pradesh
Issuer name Coupon LTP / CMP YTM at LTP Expected Yield Bond Price

Kumar Agro 65.8333 46% 8% Rs 102.73

10%
products Pvt ltd
LT Infra Debt 106.9000 7% 8% Rs 99.60
7.95%
Fund Limited
Tata Capital 6% 8% Rs 95.90
99.5844
Housing Finance 5.7%
Ltd
Government of 7% 8% Rs 96.78
110.9800
India 7.72%

8% Rs 102.38
Government of 8.72% 111.2457 6%
Andhra Pradesh
Bond Pricing Fundamentals
• The price of the bond should represent the sum total of the discounted value of
each of these cash flows and such a total is called the present value of the bond.
The discount rate or the expected yield used for valuing the bond is generally
higher than the risk free rate to cover additional risks such as default risk, liquidity
risk etc.

• Bond Price = PV (Coupons and Face Value)

• Bond Price = ∑ Coupon + Face Value

(1+y) t (1+y) t
 Calculate the Present or Intrinsic value of a 3 year bond with face value
of Rs 1000 and coupon rate being 8% paid annually. Assume that the
discount rate is 10%
• Bond Price = 80 + 80 + 80 + 1000
• 1+ 0.1 (1+0.1)2 (1+0.1)3 (1+ 0.1)3

= Rs 950.26
Calculate the bond price if the discount rate is 6%
• 80 + 80 + 80 + 1000
• 1+ 0.06 (1+0.06)2 (1+0.06)3 (1+ 0.06)3
= Rs 1053.46
When the discount rate is higher than the coupon rate, the bond is traded at a
discount. If the discount rate is less than the coupon rate, the bond trades at a
premium.
Calculate the value of a 5 year bond with face value of Rs 1000
and coupon rate 8% to be paid annually and discount rate 12%

• Present Value of Bond =

• (80 * 0.893) = 71.44
• (80 * 0.797) = 63.76
• (80 * 0.712) = 56.96
• (80 * 0.635) = 50.8
• (80 * 0.567) = 45.36
• (80 * 0.567) = 567
• = Rs 855.32
Present Value of Bonds on excel
• Calculate the value of a 6 year bond with face value of Rs 1000 and coupon rate 7%
to be paid annually and discount rate 9%.
• Answer 1 = Rs 910.28

• Calculate the value of a 4 year bond with face value of Rs 1000 and coupon rate 10%
to be paid annually and expected yield rate is 12%.
• Answer 2 = Rs 939.25

• Calculate the value of a 5 year bond with face value of Rs 1000 and coupon rate 11%
to be paid semi-annually and discount rate 14%
• Answer 3 = Rs 894.65
Cont..
• Calculate the value of a 7 year bond with face value of Rs 1000 and
coupon rate 16% to be paid quarterly and discount rate 20%
• Answer 4 = Rs 851.02

• Calculate the value of a 8 year bond with face value of Rs 1000 and
coupon rate 12% to be paid monthly and discount rate 18%
• Answer 5 = Rs 746.49
Pricing styles of Bonds (Clean Price and Dirty Price)
• Bonds are not traded only on coupon dates but are traded throughout
the year.
• The price of the bond including the accrued interest since issue or the
most recent coupon payment date is called the Dirty Price.
• Whereas price of the bond excluding the accrued interest is called the
Clean Price.
• Dirty Price = Clean Price + Accrued Interest
• On the issue date or coupon payment date Dirty Price = Clean Price
Example of Pricing Style of Bonds
• An Investor has purchased a bond of Face Value Rs 1000 with a coupon
interest of 10% p.a on 27th August 2019 for Rs 1050. Interest is paid
semi-annually on 30th june and 30th December ever year till maturity.
How the bond will be quoted on Clean Price and Dirty Price basis.
Solution:-

Clean Price will be displayed as Last Traded Price = Rs 1050

Dirty Price will be displayed at the secured payment mode page
= Accrued Interest + Clean Price
July 30 days + August 27 days = 57 days * (10% of 1000)
360 days
= Rs 15.833
Dirty Price = 1050 + 15.83 = Rs 1065.833
Extra sum on Clean and dirty price
• An Investor has purchased a 5 year bond of Face Value Rs 1000 with a
coupon interest of 12% p.a on 15th October 2019 for Rs 1055. Interest is
paid semi-annually on 30th june and 30th December ever year till maturity.
How the bond will be quoted on Clean Price and Dirty Price basis.
• Ashwin purchased a 15 years bond of Face Value Rs 1000 on which
interest offered is 14% p.a on 4th December 2019 for Rs 1100. Interest is
paid semi-annually on 30th June and 30th December every year till
maturity. How the bond will be quoted on Clean price and Dirty Price
basis.

• 1. Clean Price = Rs 1055, Dirty Price = Rs 1090 (Rs 35 is accrued

interest for 105 days)
• 2. Clean price = Rs 1100, Dirty price = Rs 1159.88 (Rs 59.88 is accrued
interest for 154 days)
Continue..
• For reporting purpose bonds are quoted at Clean Price for ease of
comparison across bonds with differing interest payment dates (dirty
prices jump on interest payment dates).
• Bonds in the debt market are quoted clean but paid dirty.
Bond Yields
• Coupon Yield (Rate) = Coupon Payment * 100
Face Value
Current Yield = Coupon Payment * 100
Current Market price of the bond
Example:- Deven purchases a Bond whose Face Value is Rs 1000 and pays
coupon of Rs 120. The Current Market price of the bond is Rs 1100.50.
Find Coupon Yield and Current Yield of this bond.
Coupon Yield = 120 * 100 = 12%
1000
Current Yield = 120 * 100 = 10.90%
1100.50
Cont..
•The main drawback of coupon yield and current yield is
that they consider only the interest payment and ignore
capital gains or losses from the bonds. Since they
consider only coupon payments, they are not
measurable for bonds that do not pay any interest
such as zero coupon bonds.
Yield to Maturity (YTM)
• It refers to the internal rate of return earned from holding the bond till
maturity. Yield to maturity (YTM) is the total return anticipated on a
bond if the bond is held until it matures. It is assumed that all coupon
payments will be reinvested at the ytm rate of the bond. This is the most
valuable measure of yield because it reflects the total income that one can
receive. Yield to maturity is also referred to as "book yield" or
"redemption yield."
Formula
• YTM = Coupon + (Face Value – Current Market Price)
number of periods to maturity * 100
• Face Value + Current Market Price
2

• There is a negative relationship between yields and bond price.

The bond price falls when yield increases and vice versa.
Q1. What is the YTM for a 5 year, 8% bond (interest is
paid annually) that is trading in the market for Rs 924.20?
• YTM = 80 + (1000 – 924.20)
• 5 * 100
• (1000 + 924.20)
• 2
• = 10%
Extra Sums on YTM
• What is the YTM for a 7.5 year, 8% bond (interest is paid annually) that
is trading in the market for Rs 930.55?
• What is the YTM for a 8 year, 9% bond (interest is paid semi-annually)
that is trading in the market for Rs 1030?
• What is the YTM for a 4 year, 16 % bond (interest is paid quarterly) that
is trading in the market for Rs 1065?
• What is the YTM for a 3 year, 12% bond (interest is paid monthly) that is
trading in the market for Rs 870?
Yield to Call
• It is calculated for Callable bond. A callable bond is a bond where the
issuer has a right but not the obligation to call or redeem the bond before
the actual maturity. The callable date is pre-specified at the time of issue.
The redemption price may be different from the face value. Yield to call
is calculated in same manner as yield to maturity.
• YTC = Coupon + (Callable Value – Current Market Price)
number of period to call * 100
• Callable Value + Current Market Price
• 2
Q1. What is the YTC for a 7 year, 11% bond (interest is paid
semi-annually) that is trading in the market for Rs 950.50? The
bond is callable at the end of 5th year at a call price of Rs 1100.

• YTC = 55 + (1100 – 950.50)

• 10 * 100
• (1100 + 950.50)
• 2
• = 4.44%
Sums on Yield to Call
• Calculate yield to call for a 10 year, 9% callable bond (annual coupon),
that is trading in the market for Rs 870. the bond is callable at the end of
7th year, at a call price 1200.
• Calculate yield to call for a 5 year, 7% callable bond (semi-annual coupon
payments), that is trading in the market for Rs 877.05. The bond is
callable at the end of 3rd year at a call price of Rs 1040.
• Calculate yield to call for a 8 year, 5% callable bond (semi-annual
coupon), that is trading in the market for Rs 700. the bond is callable at
the end of 5th year, at a call price 1050.
• Calculate Yield to call for a 10 year bond, paying interest on quarterly
basis @ 12%, that is trading in the market for Rs 950. the bond is callable
at the end of 7 years, at a call price of 1100.
Bond Equivalent Yield(YTM) and Effective annual
yield(Coupon)
• Not all bonds are made equal, however. Most bonds pay investors annual or semi-annual interest
payments. To compare the return on discounted securities with other investments in relative terms,
analysts use the bond equivalent yield formula. It is applicable to those bonds and notes that pay
coupons semi-annually or quarterly. It allows fixed income securities whose payments are not
annual to be compared with securities having annual yields.
• Bond equivalent yield = same as Annual Yield to Maturity
• Effective Annual Yield of a bond takes into consideration the effect of compounding.
• Effective Annual Yield (semi-annual) = (1 + Y)2
2

• Effective Annual Yield (quarterly) = (1 + Y)4

4
Effective Annual Yield

• T=0, 1 Re Interest is compounded annually @ 12% 1.12 (12 %)

• T=0, 1 Re Interest is compounded 1.06 + 6% 1.1236 (12.36%)

semi-annually @ 12%

T=0, 1 Re 1.03 +3% 1.0609 + 3% 1.0927 + 3% 1.12551 (12.55%)

Interest is
Compounded
Quarterly @ 12%
Calculate the bond equivalent yield for a 5 year, 8% bond
(semi-annual coupon), that is trading in the market for Rs
852.80? Also find effective annual yield for the bond?
• Bond Equivalent Yield = 40 + (1000 – 852.80)
• 10 * 100
• (1000 + 852.80)
• 2
• = 5.9%*2 = 11.8% or 12%

• Effective Annual yield = (1.04)^2 = 1.0816 = 8.16%

Extra Sums
• Calculate the bond equivalent yield for a 6 year, 9% bond (semi-annual
coupon), that is trading in the market for Rs 869.80? Also find effective
annual yield for the bond?
• Calculate the bond equivalent yield for a 8 year, 10% bond (quarterly
coupon), that is trading in the market for Rs 953? Also find effective
annual yield for the bond?
• Calculate the bond equivalent yield for a 9 year, 11% bond (quarterly
coupon), that is trading in the market for Rs 998? Also find effective
annual yield for the bond?
• Calculate the bond equivalent yield for a 7 year, 12% bond (semi-annual
coupon), that is trading in the market for Rs 1100? Also find effective
annual yield for the bond?
Interest Rates
• While computing the bond prices, we assumed that the ytm is constant
across different maturities. However this may not be true for different
reasons. For example Investors may perceive longer maturity periods to
be riskier and hence may demand higher ytm for the cash flows
occurring at distant time intervals than those occurring at short time
intervals. Therefore the ytm demanded by investors depends on the time
horizon of investment.
• Important terms:-
• Short Rate (interest rate)
• Spot Rate (yield to maturity of zero coupon bond)
• Forward Rate (future short rates)
Short Rate and Spot Rate
• Short rate:- It is the expected (annualized) interest rate at which an entity
can borrow for a given time interval starting from time t.

• Spot Rate:- Yield to Maturity for a zero coupon bond is called spot rate.

• Relationship:- short rate will help in finding the spot rate of zero
coupon bond and vice versa.
If the short rate for a 1 year investment at year 1 is 7% and year 2 is 8%, what is the
present value of a 2 year zero coupon bond with face value of Rs 1000 and also find
spot rate.

• PV (Investment) = (Face Value)

(1+r1) (1 +r2) (1+r3)…(1+rT)

• Present Value = 1000 = 1000

1.07*1.08 1.1556

= Rs 865.35
• Yield to maturity for zero coupon bond (excel) = 7.50% (also called as 2
years spot rate)
Sums
• If the short rate for a 1 year investment at year 1 is 10% and year 2 is 12%,
what is the present value of a 2 year zero coupon bond with face value of Rs
1000 and also find spot rate.
• ( PV = Rs 811.69, Spot rate = 11%)
• If the short rate for a 1 year investment at year 1 is 7% and year 2 is 9%,
what is the present value of a 2 year zero coupon bond with face value of Rs
1000 and also find spot rate.
• (PV = Rs 857.41, Spot rate = 8%)
• If the short rate for a 1 year investment at year 1 is 11% and year 2 is 14%,
what is the present value of a 2 year zero coupon bond with face value of Rs
1000 and also find spot rate.
• (PV = Rs 790.26, Spot rate = 12.5%)
The Market Expectations hypothesis and the
liquidity preference theory
• These are two important explanations of the term structure of interest in
the economy. The market expectation hypothesis assumes that various
maturities are perfect substitutes of each other and that the forward rate
equals the market expectations of the future short interest rate.
• Liquidity Preference theory (Preferred Habitat Theory) suggests that
investors prefer liquidity and hence a short-term investment is preferred
to a long-term investment. Therefore investors will be induced to hold a
long term investment only by receiving a premium for the same. This
premium or the excess of the forward rate over the expected interest rate
is referred to as the liquidity premium.
Spot Rate
• Q. If the 3 years ZCB spot rate and 4 year ZCB spot rates are 8.997%
and 9.371% respectively, find the 1 year short rate at the end of year 3.
• Ans:-
• Proceeds at the end of year 3 will be (1.08997) 3 = 1.2949
• Proceeds at the end of year 4 will be (1.09371) 4 = 1.4309
• As per Market Expectations Hypothesis, proceeds from year 3 if invested
at some rate should give the same value as proceeds received from year 4.
• Therefore 1.2949 * (1 + r) = 1.4309
• Solving this, we get
• r3 = 0.1050 or 10.5%
Practice Sum:-
• If the 5 years ZCB spot rate and 6 year ZCB spot rates are 9.38% and
10.36 % respectively, find the 1 year short rate at the end of year 5.
• Proceeds at the end of year 5 will be (1.0938)5 = 1.5656
• Proceeds at the end of year 4 will be (1.1036)6 = 1.8066
• 1.5656 * (1+r) = 1.8066
• => r = 1.8066 - 1
• => 1.5656
• => r = 1.1539 – 1
• => r = 0.1539 => 15.39%
Forward Rate
• Future Short rates computed using the market price of the prevailing
zero coupon bonds or prevailing spot rates are called forward interest
rates. Notation used is f1 to represent the 1 year forward interest rate
starting at year 1, f2 denotes the 1 year forward interest rate starting from
year 2.
Forward Rates:-
Calculate the YTM or Spot rates of Zero Coupon Bonds for year 2-5 if the 1st year
short rate is 8% and the future short rates for years 2-5 is 8.5% (f2), 9% (f3), 9.5%(f4)
and 10%(f5) resp.

• YTM for year 1 =r1 = 8%

• YTM for Year 2 = [(YTM for Year 1)1 * (f2)]1/2
• = [(1.08) *(1.085)]1/2 = 1.0825 = 8.25%
• YTM for Year 3 = [(YTM Year 2)2 * (f3)]1/3
• = [(1.0825)2 * (1.09)]1/3 = 1.0850 = 8.50%
• YTM for year 4 = [(YTM year 3)3 * (f4)]1/4
• = [(1.0850)3 * (1.095)]1/4 = 1.0875 = 8.75%
• YTM for year 5 = [(YTM year 4)4 * (f5)]1/5
• = [(1.0875)4 * (1.10)]1/5 = 1.09 = 9%
•Calculate the Yield to Maturity for year 2-5 if the 1 year
short rate is 9% and the future rates for years 2-5 is 9.5%
(f2), 9.8% (f3), 10%(f4) and 10.5%(f5) resp.
Ytm of ZCBs

Year 1
=> 9 / 1 = 9%
Year 2
=> 9 + 9.5 / 2 = 9.25%
Year 3
=> 9 + 9.5 + 9.8 / 3 = 9.43%
Year 4
=> 9 + 9.5 + 9.8 + 10 / 4 = 9.575%
Year 5
=> 9 + 9.5 + 9.8 + 10 + 10.5 / 5 = 9.76%
The term Structure of interest rates (graphical
representation is called as Yield Curve)
• The term structure of interest rate is the set of relationships between
yield rates of bonds of different maturities. It is sometimes also called as
yield curve. The most common approximation to the term structure of
interest rates is the yield to maturity curve, which generally is a smooth
curve and reflects the rate of return on various default-free zero
coupon bonds held to maturity along with their term to maturity. They
are also used as a key tool by central banks in the determination of
monetary policy to be followed in a country.
• The forward interest rate is interpreted as indicating market expectations
on the time path of future interest rates and future inflation rates.
Bond Sensitivity ( in relation to changes in Market Interest rates)
• Interest rate sensitivity is a measure of how much the price of a bond will
fluctuate due to changes in interest rate.
• Securities that are more sensitive have greater price fluctuations than
those with less sensitivity.
• This type of sensitivity must be taken into account when selecting a
bond.
• Fixed income securities and interest rates are inversely correlated.
Therefore as interest rates rise, prices of the bond tend to fall and vice
versa.
Macaulay Duration
• Macaulay duration, named after Frederick Macaulay who developed the
concept, is a measure of how long it takes for the present value of a bond
to be repaid by the cash flows from it. It is the time an investor would
take to get back the present value of the bond by way of periodic interest
as well as principal repayments.
Modified Duration (Sensitivity to Bond)
• It is the modified version of Macaulay model that accounts for changing
interest rates. Modified duration is calculated simply dividing the
Macaulay Duration by the yield. It measures the change in the value of a
fixed income security that will result from a one per cent change in the
interest rate. While Macaulay Duration is the parameter used by debt
fund managers to construct portfolios that are well suited to prevailing
current market conditions, modified duration is the preferable criterion
for an investor to use while choosing his fund.

• Modified Duration = Macaulay Duration

• 1+y
• n
Macaulay Duration Modified Duration
It measures weighted average time required until It is percentage change in price with respect to yield.
repayment

It is expressed in years Though duration term is used, it signifies sensitivity

towards yield in percentage term.
Sums on Macaulay Duration
•Q1. What is the duration for a 5 year maturity, 7%
(semi-annual) coupon bond with yield to maturity of
12%? Also find its Modified duration. Find change in
bond price if the YTM falls to 11%
•Q2. What is the duration for a 8 year maturity, 10%
(semi-annual) coupon bond with yield to maturity of
15%? Also find its Modified duration. Find change in
bond price if the YTM raises to 17%
Sum on ZCB
• Since for a zero coupon bond the cash flow is only on the maturity
date, the duration equals the bond maturity. For coupon-paying bonds,
the duration will be less than the maturity period

Q. What is the duration for a 5-year maturity zero coupon bond with
yield to maturity of 12%?
• All cash flows are only on the maturity date and hence the duration for
this bond is the maturity date.