Using Excel to Solve the Price of a Bond Problem

Suppose the settlement date of a bond you purchased is November 30, 2001; the
maturity date of the bond is December 31, 2028; the bond has a coupon rate of 6.25%
and interest is paid semi-annually; the face value of the bond is $1000; and actual
days per month/year is used for the day-count basis (not 30/360). Suppose investors
currently want an 8.3% return for this type of bond. What price should they be willing
to pay?

To use Excel, you will first go to the Function Wizard. The Function you are going
to use is in the function category of FINANCIAL and is PRICE. If you do not have
the PRICEfunction, You will need to check off the Add-ins:

(Older versions of Excel)

From Toolbar:  Go to Tools -- Data Analysis – See whether you have the above
statistical programs such as Descriptive Statistics.
If you do not have the Descriptive Statistics option or the others noted above in Data
Analysis, go to Tools -- Add-ins and click on Analysis ToolPak.

(Newer versions of Excel)

In the newer versions of Excel, here is how to get to Analysis ToolPak which you
need for more sophisticated Data Analysis:
(1)  Open Excel. You will see the Excel Spreadsheet on the page.  On the top left of
this page, you will see the Office Button (it has the MS Office logo and is in a
circle).  
(2)  Click on the Office Button  (3)  Click on Excel Options  -- it is on the bottom line
of the box (4)  Click on Add-Ins -- it's on the left side of the page
(5) On the bottom of the box, you will see  "Manage Excel Add-Ins" and a G0...  next
to it.  Click on GO...
(6)  Check the Analysis ToolPak box; Click OK.

To use the PRICE function, you need to complete the following (you may have to
scroll down to get everything):

SETTLEMENT
MATURITY
RATE
YIELD
REDEMPTION
FREQUENCY
BASIS
(1) SETTLEMENT is the settlement date. 
You have to type in DATE(2001, 11, 30) . Click the Tab key (not the <Enter> key).
This gives you the number of days from 1/1/1900.

(2) MATURITY is the maturity date.

You have to type in DATE(2028, 12, 31). Click the Tab key.
This gives you the number of days from 1/1/1900.

(3) RATE is the coupon rate.

You type in .0625. Click the Tab key.

(4) YIELD is the desired yield to maturity (or current market rate of interest).
You type in .083. Click the Tab key.

(5) REDEMPTION is the redemption value per $100 of value 

You type in 100 since you will not be given more than $100 per $100 of face value
(even if the face value of the bond is $1000). Click the Tab key.

(6) FREQUENCY is how often interest is paid; 2 for semi-annual and 1 for annual.
You type in 2 (the default) since interest is paid semi-annually. Click the Tab key.

(7) BASIS Type of day-count basis to use: 0 means 30/360, 1 is actual/actual, etc. 

Type in 1. Click the Tab key.

(8) Click on FINISH

The answer I got was 78.02187. This means that investors are only willing to pay me
78.02 per 100. For a $1000 bond (multiply by 10), investors will only pay me
$780.22.   Investors are only willing to pay about $780 for a bond with a $1000 face
value.   Why? [Because the coupon rate is below the desired yield to maturity sought
by investors].

If you know the PRICE investors are willing to pay and want to calculate the
desired Yield to Maturity, go to the Function Wizard and use the YIELD
function. Everything is the same as above except, instead of (4) YIELD; you will
see PR (PRICE). You have to type in the price per $100. Thus, if investors are
paying, say, $850 for a $1000 bond, you type in 85.