Dirty price: Dirty Price of a security is the agreed upon price, that is, buy price plus accrued interest.

Clean price: Clean Price of a security is the agreed upon price, that is, buy price without accrued interest.

Valuation of Government securities: The valuation process involves following steps.

The sum of the present values for a security's expected cash flows is the value of the security.

Premium: A security whose value is greater than its maturity value is said to be trading at a premium to maturity value.

Discount: A security whose value is less than its maturity value is said to be trading at a discount to maturity value.

Relationship between discount rate and coupon rate: Discount rate less than the coupon rate implies that the security is traded at a premium. Discount rate greater than the coupon rate implies that the security is traded at a discount. Discount rate equal to the coupon rate implies that the security is traded at a par.

Yield to maturity: The yield to maturity is the interest rate that will make the present value of the cash flows from a government security equal to the price plus accrued interest.

How do I calculate Accrued Interest (AI)?

Example 1. : What is the accrued interest on a 11.68 per cent GOI security, maturing on August 6, 2002, trading on June 1, 2001 at a YTM of 7.7395 per cent. The last interest payment date was February 6, 2001?

In the above example: Annual coupon = 11.68 ; Days in AI period = 115 (days in AI period can be found out using days 360 function in Excel). ; Days in coupon period = 180

Using the above formula :

Accrued Interest: 11.68/ 2 (multiplied by) 115/180 = 3.73

You can also use the Accrued Interest calculator (refer www.nse-india.com)

Example 2:

What is the accrued interest on a 7.46 per cent GOI security, maturing on August 28 2017, trading on January7 2003 at a YTM of 6.1081 per cent. The last interest payment date was August 28, 2002?

In the above example:

Annual coupon = 7.46 ; Days in AI period = 132 (days in AI period can be found out using days 360 function in Excel). Days in coupon period = 180

Accrued interest: 7.46 / 2 (multiplied by) 129/180 = 2.67

How do I price my government security?

Example: What will be the price of GOI loan 7.46 per cent 2017 on January 7, 2003. If the required YTM is 6.1081 per cent, the last interest payment date was August 28, 2002. Coupon is paid semi-annually, the maturity date is August 28, 2017 and the face value is Rs 100?

Solution: Using price function in Excel we get the price of the security as Rs. 112.95.You can also use the price calculator to valuate your securiites (www.nse-india.com) Note: The price determined above is the clean price of the security.

How do I calculate yield on my security?

Example: What will be the yield on GOI loan 7.46 per cent 2017 on January 7, 2003 . If that security is priced at Rs 112.95, the last interest payment date was August 28, 2002. Coupon is paid semi-annually, the maturity date is August 28, 2017 and the face value is Rs 100?

Solution: Using yield function in Excel we get the yield of the security as 6.1081 per cent.

You can also use the yield calculator.

(Source: www.nse-india.com)

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