bondAnalyst (version 1.0.1)

computingParRate: Calculates Par Rate using the given Spot Rates.

Description

Calculates Par Rate using the given Spot Rates.

Usage

computingParRate(spotRates, times, mv, pv, n)

Value

Input values to five arguments spotRates , times,mv,pv and n.

Arguments

spotRates

A vector.

times

A vector.

mv

A number.

pv

A number.

n

A number.

Author

MaheshP Kumar,

Details

As explained by Adams and Smith (2019), suppose the spot rates on government bonds are 5.263 percent for one year, 5.616 percent for two years, 6.359 percent for three years, and 7.008 percent for four years. These are effective annual rates. Based on these rated, the one-year par rate is 5.263 percent,the two-year par rate is 5.606 percent,and three-year and four-year par rates are 6.306 percent and 6.899 percent, respectively. In light of the information given, the method computingParRate() is developed to calculate Par Rate using the given Spot Rates. So, computingParRate() gives Par Rate for values passed to its five arguments. Here, spotRates is vector of the given spot rates, times is a vector of number of years ranging from 1 to any specified number of years, mv is the Maturity Value (Future Value) is taken as 100, pv is the Present Value or the Price is also taken as 100 to signify the fact that bond is trading at par of the Future Value, and n is the number of years. The output is rounded off to three decimal places. For example, an output value of 6.899 means that the a rate of 6.899 percent will cause the bond to trade at par to its Maturity Value. In other words, par rate causes the market price of bond to be at par of its face value.

References

Adams,J.F. & Smith,D.J.(2019). Introduction to fixed-income valuation. In CFA Program Curriculum 2020 Level I Volumes 1-6. (Vol. 5, pp. 107-151). Wiley Professional Development (P&T). ISBN 9781119593577, https://bookshelf.vitalsource.com/books/9781119593577

Examples

computingParRate(spotRates=c(0.05263),times=c(1),mv=100,pv=100,n=1)
computingParRate(spotRates=c(0.05263,0.05616),times=c(1,2),mv=100,pv=100,n=2)
computingParRate(spotRates=c(0.05263,0.05616,0.06359),times=c(1,2,3), mv=100,pv=100,n=3)
computingParRate(spotRates=c(0.05263,0.05616,0.06359,0.07008),times=c(1,2,3,4),mv=100,pv=100,n=4)
computingParRate(spotRates=c(0.10,0.12,0.13,0.14,0.19),times=c(1,2,3,4,5),mv=100,pv=100,n=5)