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Performing scenario analysis

Performing scenario analysis - Microsoft Excel Tutorial

From the course: Excel for Investment Professionals

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Performing scenario analysis

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- [Instructor] Oftentimes, investors want to go beyond basic bond analysis, and consider how the bond's value will change under various scenarios. This can be done easily with Excel. I'm in the 04_06_Begin Excel file. Now, we had a 7% discount rate on this bond and resulting price of $788.12. But what happens if that discount rate changes? What happens as an example if, say the market becomes more concerned about this company and risk rises? If we raise that discount rate to 9%, the value of that bond drops from $788 to $634. On the other hand, if the bond becomes safer and the new discount rate is 4%, now the bond's value rises to $1135.90. What would cause these kinds of discount rates to change? Well, it could be due to idiosyncratic factors related to the company specifically. But, what's more often the case is that the fed raises or lowers rates. So if we're at a 4% rate and the fed lowers rates by 50 basis points, that might lower the discount rate on the bond to only three and…

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