Convert your code into a function

Bond Valuation and Analysis in R

Clifford Ang

Senior Vice President, Compass Lexecon

Bond valuation function

We will value many bonds in this course
Steps described in prior chapter will be repeated
We will create the bondprc() function to simplify calculations

Steps in bond valuation

Generalize these inputs:
- p for par value
- r for coupon rate
- ttm for time to maturity
- y for yield
We also make some of the code more generic

Steps in bond valuation

cf <- c(rep(p * r, ttm - 1), p * (1 + r))

rep(x, y) - repeats y times the value of x
x = p * r = coupon payment
y = ttm - 1 = bond's time to maturity minus one year
p * (1 + r) = principal + final coupon payment

Steps in bond valuation

cf <- data.frame(cf)

Convert to data frame so we can add variables to the data (same as last section)

cf$t <- as.numeric(rownames(cf))

Create time index used for discounting
- rownames() of cf vector is equal to 1, 2, 3, 4, until the ttm of bond
- as.numeric() needed to ensure values are read as numbers

Steps in bond valuation

cf$pv_factor <- 1 / (1 + y)^cf$t

Calculate PV factor

cf$pv <- cf$cf * cf$pv_factor

Calculate PV of each cash flow

sum(cf$pv)

Sum PV to arrive at bond's value

Wrap the code

Create the bondprc() function
This will take as inputs p, r, ttm, and y

bondprc <- function(p, r, ttm, y){
   cf <- c(rep(p * r, ttm - 1), p * (1 + r))
   cf <- data.frame(cf)
   cf$t <- as.numeric(rownames(cf))
   cf$pv_factor <- 1 / (1 + y)^cf$t
   cf$pv <- cf$cf * cf$pv_factor
   sum(cf$pv)
}

Let's practice!

Bond Valuation and Analysis in R

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