Comparing coupon bonds with different investment periods can be difficult. However, there is a method that you can use to calculate a common value that lets you evaluate a bond based on its sensitivity to changes in its yield. In Excel, you implement that method using the DURATION function. You can use the DURATION function to discover how sensitive your investment is to changes in its yield.
- [Voiceover] Comparing coupon bonds…with different investment periods and terms…can be difficult.…However, there is a method that you can use…to calculate a common value…that lets you evaluate a bond based on its sensitivity…to changes in its yield.…In Excel, you implement that method…using the Duration function.…I'll show you how to perform these calculations…using the Calculating Duration 04-07 Workbook,…which you can find in the Chapter 4 folder…of you exercise files collection.…You need to know six different bits of information…for the arguments in the formula.…
The first is the settlement date…and that is the date on which…you take possession of the bond.…Next is the maturity date,…that's the date the bond stops earning interest…and you have your principle…and any unclaimed interest returned to you.…Next is the coupon interest rate.…The coupon interest rate is the amount that you're paid…either once, twice, or four times a year.…So, if you have a $100 par value or face value…for this bond,…which this function does assume,…
- Define NPER.
- Determine the appropriate method of depreciation to use on tax returns.
- Recall which function is used to evaluate a fixed-rate investment or an annuity that makes periodic payments to the beneficiary.
- Identify the term for the rate of return earned from a zero-risk investment.
- Explain the purpose of the XNPV function.
- Recognize the type of bond that pays interest before it matures.
- Name three arguments needed to use the TBILLYIELD function.
Skill Level Intermediate
1. Analyzing Loans, Payments, and Interest
2. Calculating Depreciation
3. Determining Values and Rates of Return
4. Calculating Bond Coupon Dates and Security Durations
5. Calculating Security Prices and Yields
6. Calculating Prices and Yields of Securities with Odd Periods
Additional resources1m 24s
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