vanillaBond {NMOF}

Pricing Plain-Vanilla Bonds

Description

Calculate the theoretical price and yield-to-maturity of a list of cashflows.

Usage

vanillaBond(cf, times, df, yields)
ytm(cf, times, y0 = 0.05, tol = 1e-05, maxit = 1000L, offset = 0)

duration(cf, times, yield, modified = TRUE, raw = FALSE)
convexity(cf, times, yield, raw = FALSE)

Arguments

cf

Cashflows; a numeric vector or a matrix. If a matrix, cashflows should be arranged in rows; times-to-payment correspond to columns.

times

times-to-payment; a numeric vector

df

discount factors; a numeric vector

yields

optional (instead of discount factors); zero yields to compute discount factor; if of length one, a flat zero curve is assumed

yield

numeric vector of length one (both duration and convexity assume a flat yield curve)

y0

starting value

tol

tolerance

maxit

maximum number of iterations

offset

numeric: a ‘base’ rate over which to compute the yield to maturity. See Details and Examples.

modified

logical: return modified duration? (default TRUE)

raw

logical: default FALSE. Compute duration/convexity as derivative of cashflows' present value? Use this if you want to approximate the change in the bond price by a Taylor series (see Examples).

Details

vanillaBond computes the present value of a vector of cashflows; it may thus be used to evaluate not just bonds but any instrument that can be reduced to a deterministic set of cashflows.

ytm uses Newton's method to compute the yield-to-maturity of a bond (a.k.a. internal interest rate). When used with a bond, the initial outlay (i.e. the bonds dirty price) needs be included in the vector of cashflows. For a coupon bond, a good starting value y0 is the coupon divided by the dirty price of the bond.

An offset can be specified either as a single number or as a vector of zero rates. See Examples.

Value

numeric

Author(s)

Enrico Schumann

References

Gilli, M., Maringer, D. and Schumann, E. (2019) Numerical Methods and Optimization in Finance. 2nd edition. Elsevier. doi:10.1016/C2017-0-01621-X

See Also

NS, NSS

Examples

## ytm
cf <- c(5, 5, 5, 5, 5, 105)   ## cashflows
times <- 1:6                  ## maturities
y <- 0.0127                   ## the "true" yield
b0 <- vanillaBond(cf, times, yields = y)
cf <- c(-b0, cf); times <- c(0, times)
ytm(cf, times)

## ... with offset
cf <- c(5, 5, 5, 5, 5, 105)   ## cashflows
times <- 1:6                  ## maturities
y <- 0.02 + 0.01              ## risk-free 2% + risk-premium 1%
b0 <- vanillaBond(cf, times, yields = y)
cf <- c(-b0, cf); times <- c(0, times)
ytm(cf, times, offset = 0.02) ## ... only the risk-premium

cf <- c(5, 5, 5, 5, 5, 105)   ## cashflows
times <- 1:6                  ## maturities
y <- NS(c(6,9,10,5)/100, times) ## risk-premium 1%
b0 <- vanillaBond(cf, times, yields = y + 0.01)
cf <- c(-b0, cf); times <- c(0, times)
ytm(cf, times, offset = c(0,y)) ## ... only the risk-premium

## bonds
cf <- c(5, 5, 5, 5, 5, 105)   ## cashflows
times <- 1:6                  ## maturities
df <- 1/(1+y)^times           ## discount factors
all.equal(vanillaBond(cf, times, df),
          vanillaBond(cf, times, yields = y))

## ... using Nelson--Siegel
vanillaBond(cf, times, yields = NS(c(0.03,0,0,1), times))

## several bonds
##   cashflows are numeric vectors in a list 'cf',
##   times-to-payment are are numeric vectors in a
##   list 'times'

times <- list(1:3,
              1:4,
              0.5 + 0:5)
cf <- list(c(6, 6,          106),
           c(4, 4, 4,       104),
           c(2, 2, 2, 2, 2, 102))

alltimes <- sort(unique(unlist(times)))
M <- array(0, dim = c(length(cf), length(alltimes)))
for (i in seq_along(times))
    M[i, match(times[[i]], alltimes)] <- cf[[i]]
rownames(M) <- paste("bond.", 1:3, sep = "")
colnames(M) <- format(alltimes, nsmall = 1)

vanillaBond(cf = M, times = alltimes, yields = 0.02)

## duration/convexity
cf <- c(5, 5, 5, 5, 5, 105)   ## cashflows
times <- 1:6                  ## maturities
y <- 0.0527                   ## yield to maturity

d <- 0.001                   ## change in yield (+10 bp)
vanillaBond(cf, times, yields = y + d) - vanillaBond(cf, times, yields = y)

duration(cf, times, yield = y, raw = TRUE) * d

duration(cf, times, yield = y, raw = TRUE) * d +
    convexity(cf, times, yield = y, raw = TRUE)/2 * d^2