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BondCalc: Zero Strip Yield Discounting
BondCalc has the capability to value securities either (1) using the
theoretical zero coupon strip curve, or (2) using actual strip prices.
The second page of the report menu has the two cash flow reports. See
help screen behind menu for further discussion. Theoretical values can
also be displayed on the on-screen results.
The strip curve is created by a bootstrap method as described in
Fabozzi's Handbook of Fixed Income Securities, 3rd Edition. Coupon
refinement requires using the second yield curve input screen.
NPV - BondCalc can value a security using the strip curve plus a spread
over treasuries that will be added as the theoretical curve is
being built. Enter the spread on the F11 popup over main security
input screen or enter a rating, matrix name and create a spread
IRR - Using the NPV calculated as described above and the future cash
flows BondCalc can calculate an IRR.
Spread - BondCalc calculates a Zero IRR using a Zero NPV with no spread
over and then finds the difference between this and the regular
cash flow IRR.
Difference - This is the difference between the above spread and the
regular spread to treasuries.
These four numbers can be displayed on the on-screen results in two ways.
On the Ctrl-F6 Defaults Screen the last column can be changed and these
options are among the ones available. Additionally a custom on-screen
display report can be created in the Shft-F12 (or Ctrl-Q) Report Format
database and then either be set globally or designated on the back page
of the security input. See help behind F4 at the on-screen results or F4
at the Ctrl-F6 Defaults Screen.
The following is only available in the (Ctrl-Q) Custom Report Writer:
Static Spread - The spread that will make the present value of the cash
flow, when discounted at the Treasury spot rate plus the spread,
equal to the security's price. It is a measure of the spread that
the investor would realize over the entire Treasury spot rate curve
if the bond is held to the end and the spot rates do not change.
It is iteratively solved for.
Difference Between Nominal & Static Spreads - The difference between the
spread over the current yield curve and the constant spread over
the spot curve.
Duration (Key Rate) - or Functional Duration. The duration of each cash
flow is calculated using the spot curve and then summed up.
Actual Strip Prices
There is a popup input box available over the main security input screen
to input actual yields. Use Alt-Z to access and read help behind it. To
get started a function key over the input screen writes the theoretical
yields in. Profit/(Loss) of bond stripping will be displayed at bottom
of on-screen results.