A side project which I have worked on in recent months is a bond calculator for the Annexus Research Institute. This calculator allows users to explore the relationship between interest rates and bond prices. On the left-hand side of the calculator, one can calculate the market price for an existing bond based on its characteristics and current interest rates. On the right-hand side of the calculator, one can explore the impact of future interest rate changes on the bond price.
Bond prices are inversely related to interest rates. If interest rates increase, the prices for existing bonds will decrease so that the yield to maturity earned by anyone purchasing an existing bond would match the yields available on new bonds at the higher market interest rate. The calculator allows users to explore this relationship with realistic bond examples of their choosing.
Rex Voegtlin of the Annexus Research Institute has written a white paper to accompany the calculator, and he has also developed an educational webinar about the relationship between interest rates and bond prices. Anyone is welcome to sign up for this webinar,"The Bond Dynamic of 2014: What Every Successful Advisor Must Know." The webinar is on Tuesday, July 29 from 3 PM to 4 PM Eastern time. I am not the presenter for the webinar, but I will be in attendance and will be available to answer questions at the end of the webinar.
Though designed for financial advisors, anyone is welcome to attend. When you sign-up there are a series of questions to answer. For those who are not advisors, you can provide the answers seen below as part of signing up:
* First Name (obvious)
* Last Name (obvious)
* Email Address (obvious)
* Company Name (obvious)
* Who is your Internal Marketer/Contact? Brian
* Who is your Annexus IMO? Annexus
* Please Type In Your Agent Number? Pending
* Are You a Registered Rep? Yes or No
Wade—
ReplyDeleteThe Bond Calculator could be improved by providing total % return since purchase and perhaps % annualized results instead of simply listing the “Percentage Change in Future Price After Rate Change.”
For instance, let’s assume a maturity date of 10 years, a Face Value of $10K, a coupon rate of 0%, Annual Frequency, 3% Current Interest Rates for a Maturity-Matched Bond, and a Current Bond Price (CLEAN) of $7,441 (from your calculator). Furthermore, let’s assume that the Interest Rate rises to 4% in 5 years.
With these inputs, your calculator says that the Bond’s Price in 5 years w/ the Rate Change is $8,219, which is a 4.7% loss from the Bond’s Price of $8,626 in 5 years Assuming No Rate Change. Stopping your calculator's analysis at this point can be misleading.
From another perspective, just after the rate rise in 5 years, the bond is worth $8,219 - $7,441 = $778 more since purchase, which is a positive 10.5% total return, or 2.01% per year. So the investor is ahead after 5 years, not down by the 4.7% that your calculator might convey to a casual user.
Thank you. This is a good point. The calculator only shows the impact of an interest rate change on the bond price at a specific point in time. It doesn't show total returns up to that time related to the issue you mention, and also related to any coupon income received. Investors may also want to know about total returns. This will require some reconfiguration for the calcuator. Thanks again.
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