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Appendix C: Extended Bond Calculations
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Example: Should you buy a 4% bond quoted at 97.010, to mature on October 15, 1973, and to settle on January 3, 1973?
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Solution
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First, calculate the yield-to-maturity according to the traditional method:
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 1 |
Key in 12 (days), press SAVE .
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| 2 |
Key in 30 (days/mo.), press ÷.
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| 3 |
Key in 9 (mo.), press +.
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| 4 |
Key in 12 (mo./yr.), press ÷.
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| 5 |
Key in 365 (days/yr.), press × n.
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| 6 |
Key in 4 (annual coupon rate), press PMT.
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| 7 |
Key in 97.010 (bond price), press PV.
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| 8 |
Press i (YTM) to obtain yield (8.00%).
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Next, calculate the actual price using the effective yield of 8.00% just calculated:
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| 1 |
Key in 1.031973 (settlement date), press SAVE .
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| 2 |
Key in 10.151973 (maturity date), press DAY.
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| 3 |
Key in 8.00 (calculated yield), press i.
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| 4 |
Key in 4 (annual coupon rate), press PMT.
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| 5 |
Press PV (BOND) to obtain actual price (97.02).
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To summarize:
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| | Enter: | | | See Displayed: | | |
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12 SAVE 30 ÷ 9 + 12 ÷ 365 × n 4 PMT
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% yield by conventional method
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1.031973 SAVE 10.151973 DAY 8 i 4 PMT
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actual price
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Thus,
the actual price is 97.02, instead of the quoted 97.01, when you apply a
conventionally calculated yield to a calculation using a more precise
method. Therefore, it is to your advantage to buy this bond.
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