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Excel 2010: Financial Functions in Depth

PRICE: Calculating the price of a security that pays periodic interest


From:

Excel 2010: Financial Functions in Depth

with Curt Frye

Video: PRICE: Calculating the price of a security that pays periodic interest

If your company needs to raise some cash and has determined that issuing stock isn't in its best interests, you might borrow money by issuing bonds. Pricing bonds for sale is a very tricky business. In essence you're betting that you can earn a higher rate of return on the borrowed money than you pledged to pay your bond holders. Once you know the parameters of the bond you'd like to issue you can use the PRICE function to find the break even issue price. The PRICE function has seven arguments and those are settlement date here in B3, maturity date in B4, percent coupon in B5, yield in B6, redemption value B7, frequency in B8 and basis in B9.
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  1. 2m 11s
    1. Welcome
      1m 6s
    2. Using the exercise files
      36s
    3. Disclaimer
      29s
  2. 28m 32s
    1. PMT: Calculating a loan payment
      3m 31s
    2. PPMT and IPMT: Calculating principal and interest per loan payment
      4m 18s
    3. CUMPRINC and CUMIPMT: Calculating cumulative principal and interest paid between periods
      4m 30s
    4. ISPMT: Calculating interest paid during a specific period
      2m 13s
    5. EFFECT and NOMINAL: Finding nominal and effective interest rates
      3m 31s
    6. ACCRINT and ACCRINTM: Calculating accrued interest for investments
      4m 15s
    7. RATE: Discovering the interest rate of an annuity
      2m 41s
    8. NPER: Calculating the number of periods in an investment
      3m 33s
  3. 19m 5s
    1. SLN: Calculating depreciation using the straight-line method
      1m 48s
    2. DB: Calculating depreciation using the declining balance method
      3m 10s
    3. DDB: Calculating depreciation using the double-declining balance method
      3m 20s
    4. SYD: Calculating depreciation for a specified period
      2m 13s
    5. VDB: Calculating declining balance depreciation for a partial period
      3m 24s
    6. AMORDEGRC: Calculating depreciation using a depreciation coefficient
      2m 27s
    7. AMORLINC: Calculating depreciation for each accounting period
      2m 43s
  4. 22m 33s
    1. FV: Calculating the future value of an investment
      2m 48s
    2. FVSCHEDULE: Calculating the future value of an investment with variable returns
      2m 21s
    3. PV: Calculating the present value of an investment
      2m 6s
    4. NPV: Calculating the net present value of an investment
      3m 17s
    5. IRR: Calculating internal rate of return
      2m 33s
    6. XNPV: Calculating net present value given irregular inputs
      2m 32s
    7. XIRR: Calculating internal rate of return for irregular cash flows
      1m 48s
    8. MIRR: Calculating internal rate of return for mixed cash flows
      2m 2s
    9. DISC: Calculating the discount rate of a security
      3m 6s
  5. 24m 12s
    1. COUPDAYBS: Calculating total days between coupon beginning and settlement
      3m 2s
    2. COUPDAYS: Calculating days in the settlement date's coupon period
      2m 48s
    3. COUPDAYSNC: Calculating days from the settlement date to the next coupon date
      3m 1s
    4. COUPNCD: Calculating the next coupon date after the settlement date
      2m 43s
    5. COUPNUM: Calculating the number of coupons between settlement and maturity
      2m 55s
    6. COUPPCD: Calculating the date of a coupon due immediately before settlement
      3m 4s
    7. DURATION: Calculating the annual duration of a security
      3m 20s
    8. MDURATION: Calculating the duration of a security using the modified Macauley method
      3m 19s
  6. 28m 43s
    1. DOLLARDE and DOLLARFR: Converting between fractional prices and decimal prices
      2m 36s
    2. INTRATE: Calculating the interest rate of a fully invested security
      2m 50s
    3. RECEIVED: Calculating the value at maturity of a fully invested security
      2m 46s
    4. PRICE: Calculating the price of a security that pays periodic interest
      3m 19s
    5. PRICEDISC: Calculating the price of a discounted security
      2m 48s
    6. PRICEMAT: Calculating the price of a security that pays interest at maturity
      1m 57s
    7. TBILLEQ: Calculating the bond-equivalent yield for a Treasury bill
      1m 50s
    8. TBILLPRICE: Calculating the price for a Treasury bill
      1m 31s
    9. TBILLYIELD: Calculating the yield of a Treasury bill
      1m 41s
    10. YIELD: Calculating the yield of a security that pays periodic interest
      2m 59s
    11. YIELDDISC: Calculating the annual yield for a discounted security
      2m 9s
    12. YIELDMAT: Calculating the annual yield of a security that pays interest at maturity
      2m 17s
  7. 12m 1s
    1. ODDFPRICE: Calculating the price of a security with an odd first period
      3m 17s
    2. ODDFYIELD: Calculating the yield of a security with an odd first period
      3m 3s
    3. ODDLPRICE: Calculating the price of a security with an odd last period
      2m 44s
    4. ODDLYIELD: Calculating the yield of a security with an odd last period
      2m 57s
  8. 1m 5s
    1. Additional resources
      1m 5s

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Excel 2010: Financial Functions in Depth
2h 18m Intermediate Jun 28, 2011

Viewers: in countries Watching now:

In this course, author Curt Frye shows how to perform a wide range of financial calculations quickly and easily using the many financial functions found in Excel 2010. The course details dozens of functions for evaluating cash flows; calculating depreciation; determining rates of return, bond coupon dates, and security durations; and more.

Topics include:
  • Analyzing loans, payments, and interest
  • Discovering the interest rate of an annuity
  • Determining depreciation using the straight line, declining balance, double-declining balance, and other methods
  • Calculating the future value of an investment with variable returns
  • Finding the discount rate of a security
  • Converting between fractional prices and decimal prices
  • Determining the yield of securities that pay interest periodically
Subjects:
Business Finance
Software:
Excel Office
Author:
Curt Frye

PRICE: Calculating the price of a security that pays periodic interest

If your company needs to raise some cash and has determined that issuing stock isn't in its best interests, you might borrow money by issuing bonds. Pricing bonds for sale is a very tricky business. In essence you're betting that you can earn a higher rate of return on the borrowed money than you pledged to pay your bond holders. Once you know the parameters of the bond you'd like to issue you can use the PRICE function to find the break even issue price. The PRICE function has seven arguments and those are settlement date here in B3, maturity date in B4, percent coupon in B5, yield in B6, redemption value B7, frequency in B8 and basis in B9.

The settlement date is the date that you gain ownership of the security. That date might be different from the bond's issuance date, which is the date the bond is made available for sale. The maturity date is the date the bond will be paid off. The percent coupon is the bonds interest rate that is used to determine how much money is paid to an investor every time a coupon is due. The yield is the bond's annual yield, in other words the amount of interest that humiliates during a year. The redemption value is the bond's redemption value per $100 of face value and in almost every case that will be $100.

If it's not, your financial advisor or investment strategist will tell you that it's not. Next frequency is the number of coupons that are paid every year. So the value in B8 can be either 1, 2 or 4, which means that coupons will either be paid annually, semi-annually, or quarterly. And finally, basis reflects the way that you count the number of days in a month and a year. So basis is 0, which is the default and is what we're using here, assumes a 30 day month and a 360 day year.

Other options include option number 1, which is actual which uses a 365 day year with 28 days in February for a non- leap year and 366 days with 29 days in February for a leap year. So with all that information in place let's go ahead and create our function. So I'll click in cell B11, type an equal sign, and then type price,left parenthesis and then we can fill in the cell references for our values.

First is settlement date that's in B3, comma. Maturity date is in B4, comma. The rates is the percent coupon and that is in cell B5, comma. The yield is B6, comma. Redemption value is B7, comma. The frequency and again it can either be 1, 2 or 4. That's in cell, B8 comma, and then the basis, and again that's how you count days and the month and the year, is in cell B9. Type a right parenthesis. Make sure all my references look good. They do and I'll press the Enter key to enter the formula.

And when I do we see that the price is $90.36. So that means that to break even on this investment you would need to sell it for $90.36 cents. Like the YEILD function, the PRICE function assumes bondholders always reinvest their interests and that the bonds interest rate never changes. Those assumptions rarely hold completely true but the PRICE function offers a first look at what you should charge your bond holders with the goal of making a profit on the transaction.

Find answers to the most frequently asked questions about Excel 2010: Financial Functions in Depth.


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A: Discover more on this topic by visiting Excel formulas on lynda.com.
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