Excel ODDFYIELD Function: Calculating Yield for Bonds with an Odd First Period

Excel Financial Functions

Learn how to calculate bond yields using the Excel ODDFYIELD function for bonds with odd first periods. Essential for accurate bond return assessments.

1. Overview of the Function’s Purpose

The ODDFYIELD function in Excel is used to calculate the yield (rate of return) on a security or bond with an irregular, or “odd,” first coupon period. This situation arises when a bond’s first payment period is shorter or longer than the standard cycle. For instance, if a bond is issued mid-way between coupon payments, the first payment may not align with the regular schedule.

Using ODDFYIELD ensures that investors can accurately calculate the yield based on this irregular schedule, which is crucial for making informed investment decisions and comparing bonds.

2. Syntax and Explanation of Each Argument

The syntax for the ODDFYIELD function is:

=ODDFYIELD(settlement, maturity, issue, first_coupon, rate, pr, redemption, frequency, [basis])

Arguments:

  1. settlement: The date the bond is purchased or traded, i.e., the settlement date.
  2. maturity: The bond’s maturity date, when the face value is repaid.
  3. issue: The issue date of the bond, or the date when the bond was originally offered.
  4. first_coupon: The date when the bond’s first coupon payment is due.
  5. rate: The bond’s annual coupon rate (interest rate), expressed as a percentage.
  6. pr: The price of the bond per $100 of face value.
  7. redemption: The redemption value of the bond per $100 face value, typically 100.
  8. frequency: The number of coupon payments per year:
    • 1 for annual payments,
    • 2 for semiannual payments,
    • 4 for quarterly payments.
  9. [basis](optional): The day count convention to use for interest calculation:
    • 0 or omitted: 30/360 (U.S. default)
    • 1: Actual/Actual
    • 2: Actual/360
    • 3: Actual/365
    • 4: European 30/360

Syntax Example:

=ODDFYIELD("01/01/2024", "01/01/2030", "01/01/2023", "06/30/2023", 0.05, 98, 100, 2, 0)

This formula calculates the yield of a bond with a 5% annual coupon rate, purchased at a price of $98, and an odd first period ending on June 30, 2023.

3. Practical Business Examples

1. Yield Calculation for a Semiannual Bond with an Odd First Period

A company issues a bond with a 6% coupon rate and semiannual payments. The bond was issued on January 1, 2024, and the first coupon is due on May 31, 2024 (creating an odd first period). The bond is currently priced at $102 per $100 face value, and it matures on January 1, 2030.

Example:

=ODDFYIELD("01/01/2024", "01/01/2030", "01/01/2023", "05/31/2024", 0.06, 102, 100, 2, 0)

This formula calculates the bond’s yield, helping the investor determine if the bond is worth purchasing at its current price.

2. Corporate Bond with Quarterly Payments

A corporate bond was issued on April 1, 2022, with the first coupon payment on July 15, 2022 (resulting in an odd first period). The bond matures on April 1, 2027, and pays quarterly coupons with a 4% annual coupon rate. The bond is priced at $95 per $100 face value.

Example:

=ODDFYIELD("04/01/2022", "04/01/2027", "04/01/2021", "07/15/2022", 0.04, 95, 100, 4, 0)

This formula calculates the yield on the bond, allowing investors to assess the bond’s return based on its current price and irregular first coupon period.

3. Government Bond Yield Calculation

A government bond was issued on February 1, 2023, with an odd first coupon payment due on August 1, 2023. The bond matures on February 1, 2033, and pays interest semiannually at a 3% coupon rate. The current bond price is $98.

Example:

=ODDFYIELD("02/01/2023", "02/01/2033", "02/01/2022", "08/01/2023", 0.03, 98, 100, 2, 0)

This calculation provides the bond’s yield considering its price and the odd first period.

4. Municipal Bond with an Odd First Period

A municipal bond was issued on March 1, 2024, with an odd first coupon payment on September 15, 2024. The bond matures on March 1, 2029, and pays annual interest at 5%. The bond is priced at $105 per $100 face value.

Example:

=ODDFYIELD("03/01/2024", "03/01/2029", "03/01/2023", "09/15/2024", 0.05, 105, 100, 1, 0)

This formula determines the yield for the municipal bond, taking into account the odd first period and pricing.

5. Bond Yield Calculation for Financial Institutions

A financial institution issued a bond on June 1, 2023, with a 7% annual coupon rate and quarterly payments. The first coupon is due on September 15, 2023. The bond matures on June 1, 2030, and is priced at $110 per $100 face value.

Example:

=ODDFYIELD("06/01/2023", "06/01/2030", "06/01/2022", "09/15/2023", 0.07, 110, 100, 4, 0)

This calculation provides the bond’s yield, helping financial institutions assess its return given the odd first period.

4. Best Practices

  • Verify Date Formats: Ensure that settlement, issue, first coupon, and maturity dates are entered correctly to avoid errors in the calculation.
  • Use Correct Pricing: The pr argument (price) should reflect the actual bond purchase price to ensure accurate yield results.
  • Understand Payment Frequency: Ensure that the correct payment frequency is used (annual, semiannual, quarterly) to match the bond’s payment schedule.
  • Check Yield for Comparison: Use ODDFYIELD to compare the return on bonds with odd first periods to those with standard periods.

5. Common Mistakes or Limitations

  • Incorrect Date Entry: Incorrect or invalid date entries can result in errors or inaccurate yield calculations.
  • Using Wrong Frequency: Mismatching the payment frequency with the actual bond payment schedule can lead to incorrect yield results.
  • Ignoring Basis Argument: Using the wrong day count basis can result in miscalculated yields, especially for bonds traded in different markets with varying conventions.
  • Price Should Reflect Market Value: Ensure that the bond price reflects the market value at the time of calculation to get an accurate yield.

6. Combining with Other Related Functions

  • ODDFPRICE: Use the ODDFPRICE function to calculate the price of a bond with an odd first coupon period, which can complement the yield calculation with ODDFYIELD. Example: =ODDFPRICE("01/01/2024", "01/01/2030", "01/01/2023", "06/30/2023", 0.05, 0.04, 100, 2, 0)
  • YIELD: Use the YIELD function to calculate the yield for bonds with regular coupon periods (no odd first or last periods). Example: =YIELD("01/01/2024", "01/01/2030", 0.05, 98, 100, 2, 0)
  • PRICE: Combine ODDFYIELD with PRICE to calculate the bond’s price based on yield or market conditions for regular payment periods.

7. Summary and Key Points

  • ODDFYIELD calculates the yield on bonds with odd (irregular) first coupon periods, providing the return rate based on key bond parameters.
  • It requires accurate input of dates, coupon rate, bond price, and payment frequency to ensure precise yield calculations.
  • Investors can use ODDFYIELD to assess whether a bond with an odd first period is a good investment relative to its price and return.

Key Points:

  • For bonds with odd first coupon periods.
  • Ensures yield is calculated accurately for irregular coupon schedules.
  • Match payment frequency and ensure dates are correct to avoid errors.

8. Frequently Asked Questions (FAQs)

  1. What is an odd first period?
    • An odd first period occurs when the bond’s first coupon payment is shorter or longer than usual.
  2. Can ODDFYIELD be used for all bonds?
    • No, it is specifically for bonds with an odd first period. For regular bonds, use the YIELD function.
  3. Why is frequency important?
    • The frequency determines how often interest payments are made (annual, semiannual, quarterly) and affects the yield calculation.
  4. What does the basis argument mean?
    • It defines how the days between dates are counted, which can vary depending on the market (e.g., 30/360 or Actual/Actual).
  5. Can ODDFYIELD be used to calculate yield to maturity (YTM)?
    • Yes, it calculates the yield to maturity for bonds with odd first periods.

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