Microsoft Office Tutorials and References
In Depth Information
Bond Calculations
h If interest rates rise: Earning 6% isn’t so attractive anymore, and buyers will not be
willing to pay $100. They will, however, be willing to pay something less.
h If interest rates fall: The 6% coupon looks like a great deal, and the bonds will be in
demand. In that case, buyers will pay more than the face value.
The PRICE function calculates the price an investor should pay for a bond to achieve a specified
return on his money. The syntax for PRICE, with required arguments in bold, is
PRICE(settlement,maturity,rate,yld,redemption,frequency,basis)
Given the preceding facts, an investor who requires a 7.5% return on his money would use the
following formula to determine what price to pay for a bond that matures in eight years:
=PRICE(TODAY(),TODAY()+DATE(8,1,0), 6%, 7.5%,100,2)
The result of $91.10 is what the investor should pay so that his yield is 7.5%. He will get $6.00 in
interest per year (6%
$100), plus he will earn an additional $8.90 when the bond matures and
he is paid the $100 face value. These two components — the interest and the discount — make
up yield.
×
The actual dates used for settlement and maturity are irrelevant as long as the time between the
dates is correct. In this example, Company X issued the bonds two years earlier, but the investor
didn’t buy them until today. Because they were issued as ten-year bonds, they would mature in
eight years from the day the investor bought them.
If instead, interest rates had fallen since the bonds were issued, and the investor required only a
5.2% return on his money, the formula would change slightly:
=PRICE(TODAY(),TODAY()+DATE(8,1,0), 6%, 5.2%,100,2)
Under these circumstances, the investor will be willing to pay $105.18 per $100 face value bond.
Figure 11-17 shows these calculations in a worksheet.
Figure 11-17: Using the PRICE function.
 
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