6.2 By Yield To Maturity
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What is the relationship between bond price and yield to maturity? We can construct a graph to find out.
FIGURE 6.3 Spreadsheet Model of Bond Valuation - By Yield To Maturity.
How To Build This Spreadsheet Model.
1. Start with the Basics Spreadsheet and Delete Rows. Open the spreadsheet that you created for
Bond Pricing – Basics and immediately save the spreadsheet under a new name using the File |
Save As command. Delete rows 15 through 29 by selecting the range A15:A29, clicking on Edit
| Delete, selecting the Entire Row radio button on the Delete dialog box, and clicking on OK.
2. Enter Yield To Maturity (Annualized). Enter Yield To Maturity values 1.0%, 2.0%, 3.0%,
4.0%, …, 20% in the range B16:U16.
3. Calculate Discount Rate / Period. Copy the Discount Rate / Period formula from cell B12 to the
cell B17. In cell B17, change the variable kd to B16, so that the formula reads
=IF($B$4=1,((1+B16)^(1/NOP))-1,B16/NOP) and then copy it across.
4. Calculate Bond Price. Calculate the bond price using PV function and the inputs N, INT, M,
and the Discount Rate / Period in cell B17. Enter =-PV(B17,N,INT,M) in cell B18 and copy it
across.
5. Graph the Bond Price By Yield To Maturity. Highlight the range B16:U16 and then while
holding down the Ctrl button highlight the ranges B18:U18. Next choose Insert | Chart from
the main menu. Select an XY(Scatter) chart type and make other selections to complete the
Chart Wizard. Place the graph in the range C2:J15.
This graph shows the inverse relationship between bond price and yield to maturity. In other word, a
higher discount rate (yield to maturity) lowers the present value of the bond’s cash flows (price). The
graph also that the relationship is curved (nonlinear) rather than being a straight line (linear).
What is the relationship between bond price and yield to maturity? We can construct a graph to find out.
FIGURE 6.3 Spreadsheet Model of Bond Valuation - By Yield To Maturity.
How To Build This Spreadsheet Model.
1. Start with the Basics Spreadsheet and Delete Rows. Open the spreadsheet that you created for
Bond Pricing – Basics and immediately save the spreadsheet under a new name using the File |
Save As command. Delete rows 15 through 29 by selecting the range A15:A29, clicking on Edit
| Delete, selecting the Entire Row radio button on the Delete dialog box, and clicking on OK.
2. Enter Yield To Maturity (Annualized). Enter Yield To Maturity values 1.0%, 2.0%, 3.0%,
4.0%, …, 20% in the range B16:U16.
3. Calculate Discount Rate / Period. Copy the Discount Rate / Period formula from cell B12 to the
cell B17. In cell B17, change the variable kd to B16, so that the formula reads
=IF($B$4=1,((1+B16)^(1/NOP))-1,B16/NOP) and then copy it across.
4. Calculate Bond Price. Calculate the bond price using PV function and the inputs N, INT, M,
and the Discount Rate / Period in cell B17. Enter =-PV(B17,N,INT,M) in cell B18 and copy it
across.
5. Graph the Bond Price By Yield To Maturity. Highlight the range B16:U16 and then while
holding down the Ctrl button highlight the ranges B18:U18. Next choose Insert | Chart from
the main menu. Select an XY(Scatter) chart type and make other selections to complete the
Chart Wizard. Place the graph in the range C2:J15.
This graph shows the inverse relationship between bond price and yield to maturity. In other word, a
higher discount rate (yield to maturity) lowers the present value of the bond’s cash flows (price). The
graph also that the relationship is curved (nonlinear) rather than being a straight line (linear).