BondCalc: Zero Strip Yield Discounting

BondCalc has the capability to value securities either (1) using the
theoretical zero coupon strip curve, or (2) using actual strip prices.
The second page of the report menu has the two cash flow reports. See
help screen behind menu for further discussion. Theoretical values can
also be displayed on the on-screen results.


Theoretical Valuation
---------------------
The strip curve is created by a bootstrap method as described in
Fabozzi's Handbook of Fixed Income Securities, 3rd Edition. Coupon
refinement requires using the second yield curve input screen.

NPV - BondCalc can value a security using the strip curve plus a spread
      over treasuries that will be added as the theoretical curve is
      being built. Enter the spread on the F11 popup over main security
      input screen or enter a rating, matrix name and create a spread
      matrix.

IRR - Using the NPV calculated as described above and the future cash
      flows BondCalc can calculate an IRR.

Spread - BondCalc calculates a Zero IRR using a Zero NPV with no spread
      over and then finds the difference between this and the regular
      cash flow IRR.

Difference - This is the difference between the above spread and the
      regular spread to treasuries.

These four numbers can be displayed on the on-screen results in two ways.
On the Ctrl-F6 Defaults Screen the last column can be changed and these
options are among the ones available. Additionally a custom on-screen
display report can be created in the Shft-F12 (or Ctrl-Q) Report Format
database and then either be set globally or designated on the back page
of the security input. See help behind F4 at the on-screen results or F4
at the Ctrl-F6 Defaults Screen.

The following is only available in the (Ctrl-Q) Custom Report Writer:

Static Spread - The spread that will make the present value of the cash
      flow, when discounted at the Treasury spot rate plus the spread,
      equal to the security's price. It is a measure of the spread that
      the investor would realize over the entire Treasury spot rate curve
      if the bond is held to the end and the spot rates do not change.
      It is iteratively solved for.

Difference Between Nominal & Static Spreads - The difference between the
      spread over the current yield curve and the constant spread over
      the spot curve.

Duration (Key Rate) - or Functional Duration. The duration of each cash
      flow is calculated using the spot curve and then summed up.


Actual Strip Prices
-------------------
There is a popup input box available over the main security input screen
to input actual yields. Use Alt-Z to access and read help behind it. To
get started a function key over the input screen writes the theoretical
yields in. Profit/(Loss) of bond stripping will be displayed at bottom
of on-screen results.