S2: Bond Pricing Spreadsheet Applications 1

Transforming the Bond Pricing Equation into an EXCEL Spreadsheet

During the cum interest period, the settlement price P
0
& quoted price P
adj
are defined as:
( )
f
r
CPP P
P
+
+
=
1
0
, where ( ) ( ) t r PVF t r PVA CPP P , 100 , + = , and ( ) f CPP P P
adj
= 1
0
During the ex interest period,
( )
f
r
P
P
+

=
1
0
, and f CPP P P
adj
+ =
0
.
The following inputs and their respective purposes are summarised below:
Valuation/Transaction date to obtain the corresponding settlement date, i.e., T+2
Previous & Next coupon payment dates to compute the fractional period from
settlement to the NCPD, i.e., f
Maturity date to determine the exact number of (six-month) periods from the NCPD to
maturity, i.e., t
Yield to maturity to obtain the discount rate per period, i.e., r
Coupon rate to calculate the amount of coupon interest per period, i.e., CPP
Lets look at Table C in worksheet BP-2 to see how the above bond pricing equations are
applied to generate the settlement and quoted prices of the 6.5% May 2013 CGB.
S2: Bond Pricing Spreadsheet Applications 2
Stage 1: Gather Information
B C D E F G H
10 Valuation Previous Next Yield
11 or Coupon Coupon To Coupon
12 Transaction Settlement Maturity Payment Payment Maturity Rate
13 Date Date Date Date Date (%) (%)
14
15 +2 working days YTM C
16 25/07/05 27/07/05 15/05/13 15/05/05 15/11/05 5.345% 6.50%
A Timeline of Relevant Dates
15/05/05 15/11/05 15/05/06 15/11/06 15/05/07 . 15/05/12 15/11/12 15/05/13
next coupon payment date relative to the settlement date
settlement date on 27/07/05
previous coupon payment date relative to the settlement date
S2: Bond Pricing Spreadsheet Applications 3
Stage 2: Compute P', the present value of all the cash flows beyond the next coupon
payment date on the next coupon payment date
I J K L M N
8 Present Value
9 Periods of Cash Flows
10 Between Discount Present BEYOND
11 the NCPD Rate Coupon Value Present The NCPD
12 & Per Per Annuity Value ON
13 Maturity Period Period Factor Factor the NCPD
15 t r CPP PVA(r,t) PVF(r,t) P'
16 15 2.6725% 3.250 12.2257 0.6733 107.060
A Timeline of Cash Flows Beyond the Next Coupon Payment Date on 15/11/2005
P' cash flows beyond the next coupon payment date
$3.25 $3.25 $3.25 . $3.25 $3.25 $3.25 + $100
15/05/05 15/11/05 15/05/06 15/11/06 15/05/07 . 15/05/12 15/11/12 15/05/13
next coupon payment date
settlement date on 27/07/05
previous coupon payment date
S2: Bond Pricing Spreadsheet Applications 4
Stage 3: Determine if the Bond is Cum/Ex Interest & Compute the Settlement Price
O P Q R S
6 Days Between
8 Settlement
9 Date Previous Cum
10 & Next & Next Fractional Or
11 Coupon Coupon Periods Ex
12 Payment Payment To Interest Settlement
13 Date Date Maturity Dummy Price
15 m n f = m/n DV P
0
16 111 184 0.603 1 108.569
A Timeline of Cash Flows Up to the Next Coupon Payment Date
P' PV of cash flows beyond 15/11/05 on the next coupon payment date
P
0
$3.25 CPP on 15/11/05 is included since the bond is cum-interest
15/05/05 15/11/05
next coupon payment date
settlement date on 27/07/05
previous coupon payment date
The dummy variable ensures that CPP is added to P if and only if the bond is cum
interest.
S2: Bond Pricing Spreadsheet Applications 5
Stage 4: Compute P
adj
, the Quoted Price
T
8 Quoted
9 Price
10 Adjusted
11 For
12 Accrued
13 Interest
15 P
0
16 107.280
Adjustment for Accrued Interest

P
adj
= P
0
CPP(1-f) if DV = 1, P
0
+ CPP f otherwise.

(1-f) f
15/05/05 15/11/05
next coupon payment date
settlement date on 27/07/05
previous coupon payment date