Financial Modeling Using Excel

A model for measuring the price sensitivity of a bond

interest rates using duration and convexi

Indrajit Kumar Ver

Vivek P
Anukriti J
Karan Sh
Pallavi B.

Using Excel

tivity of a bond to changes in

on and convexity

Submitted by,
Group no.: 9
rajit Kumar Verma
2015024
Vivek Patel 2015063
Anukriti Jha
2015086
Karan Shah
2015095
Pallavi B.
2015105

Documen
Bond:

Infinance, abondis an instrument of indebtedness of thebondissuer to the holders. I

obliged to pay them interest and or to repay the principal at a later date, termed the maturity
negotiable, that is, the ownership of the instrument can be transferred in the secondary market.
market. Thus, a bond is a form ofloan, theholderof the bond is the lende

Duration:

Duration is a measure of the sensitivity of the price, the value of principal of a fixed-i

where, t = respective time period, C = periodic coupon pa

Convexity: Convexity is a measure of the curvature in the relationship betweenbondprices an

used as a risk-management tool, and helps to measure and manage the amount ofmarket riskto w

Effect on bond price due to change in duration:

Bond prices are said to have an

declining interest rates indicate bond prices are likely to rise. The bigger the duration, the greater t

Effect on bond price due to change in convexity:

As interest rates increase, bo

bond prices rise. For example, if Bond A has a higher convexity than Bond B, than it indicates that a

Fig1. Effect on bond price

Last line: A model has been formed to expalin all this things
Include all the formula used in the model
Mention what formula has been used where

Last line: A model has been formed to expalin all this things
Include all the formula used in the model
Mention what formula has been used where

Documentation of the Model

dissuer to the holders. It is a debt security, under which the issuer, owes the holders a debt and, depending on
ate, termed the maturity. Interest is usually payable at fixed intervals (semiannual, annual, sometimes monthly
n the secondary market. This means that once the transfer agents at the bank medallion stamp the bond, it is h
rof the bond is the lender (creditor), theissuerof the bond is the borrower (debtor), and thecouponis the inter

e of principal of a fixed-income investment to a change in interest rates. Duration is expressed as a number of

d, C = periodic coupon payment, r = periodic yield, n = total number of periods, M = maturity value

betweenbondprices andbond yieldsthat demonstrates how theduration of a bondchanges as the interest ra

mount ofmarket riskto which aportfolioof bonds is exposed.

prices are said to have an inverse relationship with interest rates. Therefore, rising interest rates indicatebondp
e duration, the greater the interest-rate risk or reward for bond prices.

terest rates increase, bond yields increases, and consequently, bond prices decrease. Conversely, as interest ra
B, than it indicates that all else being equal, Bond A will always have a higher price than Bond B as interest rate

1. Effect on bond price due to change in duration and convexity

debt and, depending on the terms of thebond, is

ual, sometimes monthly). Very often the bond is
on stamp the bond, it is highly liquid on the second
d thecouponis the interest.

pressed as a number of years.

aturity value

hanges as the interest rate changes. Convexity is

rest rates indicatebondprices are likely to fall, while

Conversely, as interest rates fall, bond yields fall and

n Bond B as interest rates rise or fall.

A model for measuring the price sensitivity of a

Input and Output Table
Bond Price
$1,000.00
Face Value
$ 1,000.00
Coupon Rate
10.00%
Maturity of Bond(Yr)
20
YTM
10.00%
Frequency
2
Macaulay Duration
Modified Duration
Convexity

9.01
8.58
117.48

Period Cash FlowPV Cash Flow

0 ($1,000.00)
1
50.00
47.62
2
50.00
45.35
3
50.00
43.19
4
50.00
41.14
5
50.00
39.18
6
50.00
37.31
7
50.00
35.53
8
50.00
33.84
9
50.00
32.23
10
50.00
30.70
11
50.00
29.23
12
50.00
27.84
13
50.00
26.52
14
50.00
25.25
15
50.00
24.05
16
50.00
22.91
17
50.00
21.81
18
50.00
20.78
19
50.00
19.79
20
50.00
18.84
21
50.00
17.95
22
50.00
17.09
23
50.00
16.28
24
50.00
15.50

Duration Convexity
47.62
90.70
129.58
164.54
195.88
223.86
248.74
270.74
290.07
306.96
321.57
334.10
344.71
353.55
360.76
366.49
370.85
373.97
375.95
376.89
376.89
376.03
374.41
372.08

86.38
246.81
470.12
746.22
1066.02
1421.36
1804.90
2210.09
2631.06
3062.61
3500.12
3939.53
4377.26
4810.17
5235.56
5651.08
6054.73
6444.81
6819.90
7178.85
7520.70
7844.72
8150.36
8437.22

25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40

50.00
50.00
50.00
50.00
50.00
50.00
50.00
50.00
50.00
50.00
50.00
50.00
50.00
50.00
50.00
1050.00

14.77
14.06
13.39
12.75
12.15
11.57
11.02
10.49
9.99
9.52
9.06
8.63
8.22
7.83
7.46
149.15

369.13
8705.07
365.61
8953.79
361.60
9183.37
357.13
9393.92
352.27
9585.64
347.07
9758.78
341.56
9913.68
335.79 10050.73
329.79 10170.39
323.60 10273.12
317.26 10359.44
310.78 10429.92
304.21 10485.10
297.55 10525.59
290.84 10551.96
5965.92 221861.83

Total

18017.04 469912.89

ensitivity of a bond to changes in interest rates using d

Effect on Bond Price Due to change in Yield
If Yield Changes By
1%
Percent Change in Price due to Durati
-8.58%
Percent Change in Price due to Conexi
0.59%
Total Percent Change in Price
-7.99%

Help

Price Sensitivity
Coupon RateBond Price
$1,000.00
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%

ates using duration and convexity

Help
Filled by Customer
OutPut Value

Price Sensitivity
Duration
Convexity
9.01
117.48
149.12
139.49
132.08
126.20
121.43
117.48
114.15
111.31
108.86
106.72
104.83

First worksheet should contain the documentati

Second worksheet should contain the model.
The third worksheet should show how the mode

1 i

contain the documentation about the model

uld contain the model.
ould show how the model works using some relevant data.

CF
1 i t
t

t 1

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