Excel Tutorial on Bond Pricing
Lorenzo Garlappi
February, 27, 2003
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Entering Constants
Suppose you want to assign a name to a value you would refer often in your
spreadsheet (e.g. the coupon rate of a bond). You can do this by entering
the value in a cell and then naming this cell by clicking on Insert, Name,
Define.
Example:
1. Enter a value for a coupon rate in cell A1
2. Put the cursor on cell A1 and Click on Insert, Name, Define.
3. Type CR for the coupon rate you just entered.
If you want to refer to the coupon rate anywhere in the spreadsheet you
can call the value of the coupon rate by entering = CR.
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Entering a Formula
Suppose you want to calculate the present value at 10% of one dollar.
1. Enter $1 in cell A1
2. In Cell B1 enter =A1/(1+0.1)
3. Hit enter
Virtually every formula is entered this way.
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Calculating the price of a bond- The “brute
force approach”
We want to calculate the price of a bond but we don’t know anything about
annuity formulas or the like. We can still do it by simply taking a “brute
force” approach that starts from the basic: discounting cash flows.
Suppose you know coupon rate (CR), face value (FV), maturity (T),
number of payment per year (NOP) and the annual yield to maturity (y) of
a bond. (See the spreadsheet “Bond Pricing Basics-Tutorial” from my
web page)
1. Enter the constant of your problem as described above.
2. Determine the yield to be used in each period by entering: = y/NOP .
Give the name rate to this number using the procedure described
above.
3. Determine the dollar coupon payment by entering: = F V ∗ CR/NOP
4. On a row, write down the dates in which coupons are received (there
are as many dates as coupon to be received). E.g. if the bond pays 8
semi-annual coupon enter 1 2 3 4 5 6 7 8.
5. On the next row, calculate the present value of each coupon you are
supposed to receive. For example, suppose you want to calculate the
present value of the first coupon. You entered 1 (to indicate the first
coupon) in cell B17 and 25 in cell B18. In cell B19 you simply enter
=B18/(1+rate)ˆ B17. You can copy this formula by dragging it
under the remaining cash flow without entering anything else.
6. Sum all the present values of each cash flow by using the function
Sum(.,.). See the spreadsheet Bond Pricing Basic - Tutorial for
further details.
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Calculating the yield of a bond
For details you can see my tutorial spreadsheet: Finding yield to maturity
- Tutorial
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1. Follow the steps above for entering the known constant in your problem.
Now notice that the yield is not a constant! This is what you want to
figure out. The bond price is now a know constant!
2. In a separate cell enter a conjectured value for the YTM. Call this cell
y.
3. Follow the steps above in order to calculate the bond price given the
conjectured yield y.
4. Use Solver to find the yield y that set the conjectured price of the
bond equal to the given price.
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