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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.
One straightforward way to calculate the value of a bond is to estimate the bond's yield given the investment's conditions. Those include the price, the coupon rate, and time to maturity. In Excel, you can calculate a bond's yield perhaps not surprisingly by using the YIELD function. The YIELD function has seven arguments and those are the settlement date which is the date that you gain control of the security. Then maturity date which is the date that the investment ends and all money is payable to you. Then there is the percent coupon argument and that argument gives you the interest rate, representing the amount of money that you'll receive for each of your coupon payments.
Next is the price and this is the price per $100 that you have to pay to gain the security. Then you have the redemption value which is the base value that you get in return for your $100 investment. Your redemption value is almost always $100 and the reason that is, is because you're receiving coupon interest and the bond's creators basically don't want to pay you twice. It's not unheard of for you to have a redemption value that's higher than the price, but it is somewhat uncommon. Next we have the frequency and that is the number of coupon payments per year.
It can be 1 which is annual, 2 which is semiannual, or 4 which is quarterly. Then finally, we have the basis and basis is how you count the number of days in a month and a year. Basis number 0, which is what we are using here, is the North American default and that assumes a 30 day month and a 360 day year. If this value were 1, then we would be counting actual days. So a 365 or 360 day year, depending upon when it fell, and also 28 or 29 days in February depending upon a leap year versus a non-leap year.
So with all this information in place we can calculate the yield of this investment. So in cell B11 I'll type in equal sign and then yield, left parentheses and then I can start filling in the cell references for the arguments. So, settlement date is in B3, comma, maturity date B4, comma, the rate B5, and next is the price that's in B6, comma, the redemption value is in B7, comma, the frequency B8, comma, and then the basis in B9 and a right parenthesis because that is my last argument.
Now I'll just make sure that all of my references look good. They do and I'll press the Tab key. When I do, I see that the yield of this bond is 4.2499% or basically 4.25%. The YIELD function provides a simplified look at bonds. The function assumes the bond interest rates stays constant which almost never happens, that you reinvest your bond interest, and that there are no delays in getting paid when the bond matures. Even so, the YIELD function provides a good first look at a bond's potential value.
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