Bond Valuation

Bond valuation is a procedure by which an investor arrives at an estimate known as fair value or intrinsic worth, of a bond. The fair value of a bond represents the present value of the stream cash flows it expected to generate.

A bond is classified and measured at amortized cost under IFRS 9 if it is held within a business model to derive contractual cash flows, and its contractual terms provide for uniquely principal and interest payments in terms of financial assets and liabilities.

Bond Price & Duration

Workings:

Bond price: =NPV(B2,B4:B13)

Bond duration: = =NPV(B2,C4:C13)/B15

Workings:

Bond YTM: =YIELD(J6,O6,J3,J9,100,J4,3)

Bond YTM: =IRR(J15:O15)*2

Duration As Price Elasticity & Effect of Coupon on Duration

Bond Immunization

Note: From table 05 and 06 above, as the bond yield falls from 6% to 5%, the bond prices rise, the reinvested coupons fall, and the bond product price fall as well.

When bond a yield decreases, a bond price increases, indicating an inverse relationship between bond yield and bond price. This is because a lower yield shows that a prevailing interest rate is lower, causing an existing bond with fixed, higher coupon payment more attractive to investors.

Spot and Forward Interest Rates

Workings:

From Table 07, T2 (period) spot rate: =(($B$3+$B$3*$B$2)/C8)^(1/C5)

Workings:

From Table 08, forward rate from year 4 to year 7: =LN(L18/I18)/(E2-E3)