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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.
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.
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