BondManager
User Guide
Version 1.0
BondManager is a set of tools
built on a common database that allows you to manage your bond holdings,
analyze bond issues, and compare how interest rate changes affect bond issues
and your portfolio of bond positions.
Following is a brief introduction to the capabilities of this Pocket-PC
application software, starting with an overview of the main menus.
BondManager is not a document-centric
application, which means upon invocation all you’ll see is the menu and a blank
screen. Switcher and similar utilities
typically only include applications with open document windows in their list of
running applications - the blank window gives Switcher something to find. If you don’t have Switcher or it’s
equivalent, a tray icon will be available whenever BondManager
is not the front most application.
When you first open BondManager,
you’ll see the menu at right.
BondManager uses a database to
store bond definitions and portfolio positions that you create while using
it. All bond definitions and portfolio
positions created are immediately committed to the database, so there’s no need
to save at the end of a session. Just
quit.
Open Database
Given the personal nature of
Pocket-PCs, BondManager assumes that there is only
one user and one database - it opens a database in a default directory upon invocation
so you can get right to work. The only time you’ll need to use Open Database is
after you have previously closed the database.
This menu item is only enabled when the database is currently closed.
Close Database
If you can’t choose database directories, you might ask why
include Open Database and Close Database at all? The answer is that ActiveSync won’t sync open
files and an open database will probably have several files open. Therefore, if you ever want your database
backed up, you can use Close Database to close it manually and then reopen it
after ActiveSync has finished. This menu
item is only enabled when the database is currently open.
The Edit menu is the entry point for creating and
subsequently modifying bond definitions and positions based on those
definitions. Bonds are the only asset
type supported. It also provides the
entry point to the BondManager’s two preferences
dialogs. All Edit menu items are always
enabled.
Bonds
The Bond Definition Dialog is a structured view of the data
that defines a stock to the tools in BondManager,
including its market price, par value, inception date, maturity date, annual
coupon rate, number of coupons per year, and which day counting method to use.
The Positions dialog is your entry point for creating a
position in a option or stock issue. It
captures the purchase date, number of units in the position, and the cost of
the position. It also captures a ‘Note’
field, allowing you to annotate a transaction number or a source of cash for
the transaction, etc.
It also displays any positions previously created for the
specified option or stock issue, including purchase date, number of shares or
options, the original cost of the position, its current market value, the
capital gain (loss), any coupon income that would have been generated since the
purchase date, the net gain (capital gain plus income), the annualized yield
that the net gain represents, and any note you may have entered when you
created the position.
If you read the previous section on the Positions dialog, you
can see that there are quite a few columns of data computed for each
position. To manage that complexity
within the confines of a small screen, each of the columns in the Positions
dialog’s list of defined positions can be made invisible by un-checking the
associated check box in the Position List Options dialog. The left column of preferences affects the
display of columns in the Positions dialog while the right column of
preferences affects the display of columns in the Portfolio Navigator.
The Confirmation Options Dialog controls behaviors spanning
various dialogs. Two preferences affect
behavior within the bond definition dialog, two affect behaviors within the
Bond Analyzer dialog, two affect behaviors within the Positions dialog.
The Tools menu assembles a variety
of tools in one place to accomplish a variety of tasks. One is analytical, one is graphical, and two
report the current state of your portfolio – one hierarchically, the other as a
plain text transcript. Following is a
brief introduction to each.
Bond Analyzer
The
primary purpose of the Bond Analyzer is to report current yield, yield to
maturity, Macaulay duration, modified duration, convexity, and imputed market
value under various market yield conditions (which you control by setting DeltaYTM). Bond
Analyzer also separates the contribution of coupons and par, allowing you to
window into each contribution to value under the What-if conditions defined by
your DeltaYTM setting. The Bond Analyzer menu item will be disabled
if there are no bonds are defined in the database.
The Rate
Sensitivity Explorer provides a graphical view of how the value of bonds and
your portfolio of bonds are affected by interest rate changes. This menu item is disabled when there are no
bonds defined in the database.
Portfolio Navigator
The Portfolio
Navigator presents your current portfolio positions in a hierarchical
explorer-like navigator, allowing you to drill down to the positions level
within a particular bond, or abstract upwards in the tree until all you can see
are column totals for the entire portfolio.
Subtotals are provided at each level in the tree, i.e. the instrument
level (all bonds in your portfolio), the issue level (particular bond issues),
and the position level (issues you have a stake in). Background colors distinguish between row
types to manage display complexity. This
menu item is disabled when there are no positions in the database.
The Positions
Transcripts dialog produces a detailed text transcript of all positions closed
in a given year or currently open. It’s
the textual equivalent of a position level Portfolio Navigator display. It allows you to save the contents of the
transcript to a file, thus providing convenient tax time documentation. This menu item is only enabled when there are
positions in the database.
The Help Menu currently contains only ‘About box’
information about BondManager.
This section covers various considerations common across
tools in BondManager, including the precision with
which numbers are stored, slight variations from the Windows’ standard behavior
for combo-boxes, and an overview of database behavior, and of the bond
definition dialog.
Many of the edit boxes you’ll encounter in BondManager dialogs await and/or display a numerical
value. Most of these values are stored
with floating point precision (23 magnitude bits in the mantissa and 7
magnitude bits in the exponent), producing the equivalent of 6.9 significant
decimal digits. Examples of this level
of floating point precision include interest rates, coupon amounts, and market
prices.
Number of bonds in a position and the total cost of a
position are all stored with double precision (52 magnitude bits in the
mantissa and 10 magnitude bits in the exponent), producing the equivalent of
15.6 significant decimal digits. When
either of these floating point representations is retrieved from the database
and presented in a dialog control, it may be formatted with a fixed number of
fractional digits, potentially truncating presentation of some of the
significant digits. Be assured that the
originally entered precision has not been truncated in the database, they’re just
not being displayed.
In the interest of minimizing pen taps, BondManager
combo-boxes operate slightly differently from the Windows standard. Suppose you’re using the drop-down portion of
the combo-box and something in it is currently selected. If you tap somewhere in the dialog outside
the drop-down box in a standard Windows application, it cancels the
selection. By contrast, BondManager accepts the selection.
It is useful to note that once saved, a bond definition will
be retained in the database forever, so it behooves you to limit the number of
definitions you create to those that are actually meaningful. The storage occupied by a bond definition is
quite small, but BondManager thinks that each
definition is equally significant, so the identifiers for any junk definitions
that may creep in will take up rows in the drop-down box when you’re trying to
locate a definition later.
The bond definition dialog has an edit box for the bond’s
unique identifier, its current market price, one labeled ‘Description’ whose
contents serve no other purpose than confirming that you’ve recalled the
definition you thought the identifier represented.
Any string of characters will suffice as the identifier -
however, using the generally accepted identifier can eliminate confusion later
when you can’t remember what you meant by ‘Ford’, which could represent
hundreds of distinct ‘Ford’ bond issues.
The database locates bond definitions using the identifier
you provide in the control located in the top left area of the dialog. This control is a combo-box, which means it
has both edit and drop-down capabilities.
You can recall instrument definitions by selecting an identifier from
the drop-down box, or by a combination of ‘typing’ and scrolling. It supports auto-completion, so the ‘typing’
required on recall is minimal. Whatever
capitalization is used when the instrument definition is first saved, defines
the identifier’s capitalization forever more, but when you look up an
identifier later, capitalization is ignored – it’s used for presentation only.
Using the commonly accepted bond identifier
You can use any arbitrary identifier in a bond definition,
but it’s wise to use the commonly accepted identifier, if for no other reason
than it helps minimize ambiguity later.
Suppose that you haven’t modified
the default values of the confirmation options and have just defined an
instrument with the identifier ‘Ford Mtr Co Del’. When you click the OK button in the upper
right hand corner of the dialog, a confirmation dialog like the one at left
will be displayed. Screen space on the PocketPC is precious and many of the dialogs are packed
with controls, so bond definition dialog posts a small confirmation dialog,
asking you to confirm or cancel saving the changes you’ve made to the
definition as a substitute for explicitly including a Cancel button. When you initially define a bond, it may seem
superfluous to ask if you really meant to save the definition, but later when
you’re editing a preexisting definition, the opportunity to cancel the save
will prove more useful.
If you’d rather opt out of confirmations like these, you can
use the Confirmation Options dialog to uncheck the preference labeled
‘Definition dialogs – close’. When this
preference is unchecked, subsequent close events in any of the three instrument
definition dialogs will simply update the database without asking permission.
If you’ve already detoured through the Confirmation Options,
you may have noticed a preference labeled ‘Definition dialogs – change
symbol’. This preference operates
similar to ‘Definition dialogs – close’, but is triggered by changing the value
of the bond identifier (symbol) while one or more of the remaining dialog controls
contains a value different from the associated value in the database. Naturally, if confirmation is enabled and
you’ve never saved a bond definition with that identifier before, then a
confirmation dialog will post no matter what state the controls are in.
The
Bond Definition Dialog operates analogously to the Stock Definition Dialog and
is affected by the same preferences that affect database updates in the Stock
Definition Dialog. The bond identifier
is a combo-box with the same behaviors as the stock symbol combo-box. The Bond Definition Dialog includes controls
for entering a bond symbol, the bond’s current market price, its par value,
maturity date, coupon rate, number of coupons per year, etc. The Bond Definition Dialog imports the
Current Yield, Yield to Maturity, and Macaulay Duration from the Bond Analyzer,
but we’ll get to those later.
Refer to the Symbol / Identifier discussion in the
Instrument Definitions section above.
Market price and par value are currency denominated, single
precision values.
The bond’s ‘Dated Date’ is called its inception in BondManager. The
date of a bond’s first coupon is usually half a year after the bond’s inception
date (for a ‘normal’ bond paying two coupons per year). BondManager
calculates coupon dates backwards from the given maturity date. The bond’s maturity date usually coincides
with the last coupon date, but in some cases, there may be slight differences
between the bond’s official settlement date and the date of its final
coupon. To ensure accurate income
calculations, you should set the maturity date to the bond’s final coupon date.
Accurate coupon income calculations also depend on the
inception date. For BondManager
the inception date specifies the date before which no coupons are paid, so it need
only include the bond’s first coupon date to ensure accurate income
accounting. Beware that setting the
inception date sufficiently early or the maturity date sufficiently late could
infer the existence of ‘ghost’ coupons. BondManager will analyze any sort of bond you can define in
the dialog, but if you’re interested in accurate accounting, you’ll probably
want to avoid bestowing your portfolio with ghost coupons. Even if your mail is delivered by Ghost Riders
Express, which frankly, has the world’s ghastliest delivery record, you’ll
still face considerable difficulties depositing those ethereal coupons in your
local bank.
Only two digits of the inception and maturity date years are
displayed, but each date has four significant digits, so you should be careful
about just typing over the two visible digits.
For example, where 1997 is represented by 97, typing over 97 with 07
will get you 1907, not 2007. You can
verify what the control actually contains, by using its drop-down arrow to
inspect the full calendar.
The annual rate at which a coupon
bond produces income is given by the coupon rate. The annual coupon rate is divided among the
coupons specified. Each coupon is paid
in the amount of the coupon rate times the par value divided by the number of
coupons per year. The vast majority of
bonds pay coupons twice per year (the default), so a coupon bond with a quoted
rate of 8% will have two annual coupons, each amounting to 4% of the par value.
Setting the coupon rate to 0% or setting the number of
coupons per year to zero are both effective means of modeling a zero-coupon
bond. Conversely, coupon bonds will pay
a nonzero percentage of the par value and have at least one coupon per year.
Finally, regarding data entry, a complete bond definition
will specify the type of day counting used by the bond. Bonds have a long history, preceding
computers and hand calculators. Prior to
ubiquitous computing power, accurately computing accrued interest using the
actual number of days in a month or year literally represented more computing
effort than the extra accuracy was worth, so simplifying conventions crept in,
and some are still with us.
Corporate, agency, and mortgage backed securities stuck with
the concept that all months have thirty days and daily interest is the quoted
annual interest rate divided by 360 - a day counting method called 30/360. Certificates of deposit and various interest
rate indexes favor using the actual number of days in each month, but have
retained 30/360’s daily rate calculation – a day counting method called
Actual/360. Finally, Actual/Actual day
counting is most often employed for Treasury bonds and similar notes. Actual/Actual daily interest is the quoted
annual rate divided by 365 or 366, depending on whether the day in question is
within a normal or a leap year.
Having specified the relevant values above, the current
yield, yield-to-maturity, and Macaulay duration are displayed. Current yield expresses the ratio of the
coupon amount to the current market value of the bond. Yield to maturity is the interest rate which
when applied to the bond’s par value and all of its coupons will result in the
current market value of the bond.
Macaulay duration remaps a coupon bond’s maturity to where it would be
if it were a zero-coupon bond paying with the computed yield-to-maturity.
There are two preferences dialogs
in BondManager, both launched from the Edit menu.
The Confirmation Options dialog allows you to view and
modify the current value of six confirmation options which affect behaviors in
the Bond Analyzer dialog, Bond Definition dialog, the Positions Dialog, and the
Portfolio Navigator.
The Positions List Options dialog allows you to view and
modify the visibility of columns in positions lists that appear in the
Positions Dialog and the Portfolio Navigator.
There are three groups of preferences in the Confirmation
Options dialog. Each preference controls
whether to require user confirmation before doing something irreversible to the
database. The first group controls
whether to confirm Bond Definition updates. The second group controls whether
to confirm portfolio position modifications and deletions.
The second and fourth check boxes indicate your desire to
have BondManager post a confirmation dialog before
updating a bond definition when you close the dialog. The second check box affects close events in
the Bond Analyzer dialog and the fourth check box affects close events in the
Bond Definition dialog. The default
value for both preferences is to require confirmation.
The first and third check boxes indicate your desire to have
BondManager post a confirmation dialog before
updating a Bond Definition when you change the identifier in the bond
definition and analyzer dialogs. The
first check box regulates change identifier behavior in the Bond Analyzer
dialog. The third check box dictates
change identifier behavior in the Bond Definition dialog. The default value for both preferences is to
require confirmation.
The preferences in the second group affect whether you’re
queried for confirmation after pressing the Delete or Modify buttons in the
Positions dialog. Confirming position
deletes is probably a good idea, but it’s not a huge tragedy if you don’t
confirm modify operations, because you’ll have the opportunity to re-Enter the
position before quitting the Positions Dialog, but no warning will post when
you close the dialog with values present in the controls above the Enter
button. The default value for both
preferences is to require confirmation.
Positions List Options are
virtually self-explanatory. The
preference names correspond with columns in the Positions dialog and the
Portfolio Navigator. The preferences in
the left column affect the visibility of columns in the Positions dialog and
the preferences in the right column affect the visibility of columns in the
Portfolio Navigator.
All of the preferences have the default value of enabled
(checked), so all columns will be visible in each of the affected dialogs. The columns appear in the same order that
they occur in the preferences list at right.
The only preference that doesn’t coincide with a column
heading is the very last one on the right – ‘Initially Hide Positions’. The Portfolio Navigator has many row types; the
row type at the leaf level in the hierarchy displays a position in a format
almost identical to the display used in the Positions dialog.
The justifications for a
default of initially suppressing the display of positions went something like
this. 1) Positions are always displayed
in the Positions dialog. 2) You have the
option of expanding an issue’s summary node to see the positions that
contribute to that subtotal row. 3)
Portfolios would require more scrolling if the positions were visible. 4) It would be quite a bit of work to toggle
all of the issue expansion nodes off, to facilitate fitting more summary
information onto the small screen.
There are three dialogs in BondManager that deal with positions, the Positions Dialog,
the Portfolio Navigator, and the Positions Transcripts dialog. The Positions Dialog offers the opportunity
to view or create the positions linked to a specific stock or option issue.
The Portfolio Navigator provides a top-down view of your
bond portfolio, optionally expanding or collapsing branches in the hierarchy
down to individual positions at the leaf level.
The Positions Transcripts dialog provides a text transcript
equivalent to the leaf level in the Portfolio Navigator. The intent is to export these journal entries
for review, tax records, and other documentary purposes.
The Positions Dialog is where all positions in your
portfolio are created. BondManager tries to anticipate which bond you want to edit
positions for based on the last issue you defined, analyzed, or created/edited
positions for.
In the screen shot at right, we’ve selected
‘Ford Mtr Co Del’
(a long term bond on Ford’s Delco subsidiary) from the list of bond identifiers
and filled in values for # Bonds.
Changing the focus from the # Bonds control causes the dialog to compute
the Total Cost based on the current market value of the bond (in the bond
definition) and the quantity specified here.
The calculation is unaware of fee structures, so if you want to add
purchasing costs as part of your cost basis, you would add that amount into the
Total Cost now. We’ve increased the
Total Cost by $500.00 so we can show a capital loss and set the purchase date
to 07-Feb-2005. You might also take this opportunity to
create a note for yourself regarding the source of funds or whatever you feel
is appropriate for the Note field. We
classified the source of funds as ‘Lottery winnings’.
Note that it’s not necessary to select a bond identifier
from those already defined in the database.
If you enter a new identifier, a placeholder bond definition will be
created for you, though BondManager will not make any
assumptions about the issue’s current market price, coupon rate, maturity date,
etc. The 
market price in a placeholder
definition is set to 0.00 to serve as a reminder that its value has never been
properly defined. With so much
information missing, you’ll find that Income and Yield columns (discussed
below) contain meaningless placeholder values as well.
The current date is used as the default value for the
Purchased date. Future dates are
disabled, so you can’t accidentally create pro forma positions.
# Bonds
The number of bonds in a position is stored as a double
precision floating point number.
Although fractions of a bond don’t find much practical application,
reinvestment plans often produce fractional shares of stock, so we’ve allowed
for fractional bonds here to accommodate the possibility. For short sales, you’d specify the number of
units as a negative number.
Total Cost is
also stored as a double precision floating point value. The presumption is that it represents the
cost of the position including any transaction fees. As an example, if you defined ‘Ford Mtr Co Del’
previously in the Bond Definition dialog, you could choose ‘Ford Mtr Co Del’
from a list of sbond identifiers in the Bond ID
control. If you then enter 100 for the
number of bonds, it calculates and enters the cost of the position based on the
market price you entered for ‘Ford Mtr Co Del’
in the bond definition. No fees are
added at this point (that’s left for you to do manually). We’ll set the date back a year and add $500
to the total cost to create a capital loss.
Note that the Total Cost associated
with a short sale is negative, thus representing an inflow of capital after
expenses. Fees would reduce the
magnitude of a short sale’s (negative) proceeds.
The Note field is provided to document almost
anything associated with the position – typically, the position’s source of the
funds. We’ll adopt the source of funds
convention and call the source ‘Lottery winnings’.
Once a symbol has been entered and
there are values for the number of shares and the total cost, the Enter button
will be enabled. Tapping the Enter button inserts a position
representing the fields above into the database.
Any position that appears in the Active Positions control
has persistent status. This dialog is
the one place where you can modify or remove positions from the database. All stored positions for the currently selected
bond identifier are displayed in the Active Positions list.
If, in the year before we won the lottery, we sold our
classic Vette and bought 200 bonds of the very same
‘Ford Mtr Co Del’ bond issue. we’d see two positions
in the database.
Note that the most recently created position appears first
in the list, not last. This is done so
you will have visual confirmation even when the list contents exceed the size
of the control.
A Total row, highlighted in powder
blue, has been added to depict the sums for each of the columns. The one exception is the % Yield column which
displays the cost weighted average yield of the contributing positions (which
depict annualized yields in this column).
This entry gives you immediate feedback on how well cost averaging is
working for you. The total row is only
visible when more than one position exists for the issue you’ve selected.
Active Positions list columns
Column headings are generally self explanatory, so we’ll
focus on a few things that may not be as readily apparent. The Net Gain column displays the sum of the
Capital Gain and Income columns. The
Note column displays the Note you made to yourself before Entering the position
in the list.
Managing Display of the Positions
List
Clearly, you can’t see the contents of all columns without
scrolling the Positions List horizontally, but you can disable the display of
any of the columns in the Positions List Options dialog, thus reducing the need
to scroll horizontally. The list control
also supports column resizing, reordering, and sorting (toggles between
ascending and descending) by tapping on the column header. If a total row is present, it is not included
in the sort.
Managing the Contents of the
Positions List
The three buttons below the Positions List allow you to
manage the list of positions displayed above.
If you select one of the positions in the list, you’ll see the row
highlight and the three buttons at the bottom of the screen become
enabled. You may notice that you can’t
select the total row – it’s not a real position, just a summary entry in the
list control.
Here’s what happens when you select one of the three buttons
at the bottom of the dialog.
Delete
The Delete button is
the simplest of the three. Selecting it
causes the message box below right to post over the dialog. If you click ‘Yes’, it the position will
disappear from the database forever. The
Delete button is the only one of the three bottom buttons that supports
multiple selections.
Modify
The Modify button is very much like
the Delete button, in that it warns you that you are about to delete the
selected position, and once you select ‘Yes’, the position will be permanently
deleted from the database, just as it promised. The difference is that Modify overwrites,
without asking permission, all of the fields in the dialog with values taken
from the position you are ‘modifying’.
Clearly, you shouldn’t use the Modify button if you have typed
information into the fields above the Enter button that you care about.
After you complete your modifications, you must re-Enter the
position in the database. Until it
appears in the Active Positions list below the Enter button, it’s not saved in the database – that’s why the
warning message says “you are about to permanently delete the selected
position” when you just selected Modify.
It’s really been permanently deleted until you re-Enter it.
Close
The Close button also
has irreversible consequences, but it does not have an associated preference in
the Confirmation Options Dialog because it needs to capture additional
information along with your approval to proceed. The Close Position Dialog completely overlays
the Positions Dialog and collects three things from you which enable converting
it into a closed position. The date the
position was closed, the net proceeds from the sale, and a closing note. The closing date can be no later than the
current date. Upon selecting the ‘OK’
button, a ‘closed position’ is created in the database with all of the
information previously associated with the active (open) position. The active (open) position is then deleted.
There is no mechanism for modifying a closed position – it
can’t be deleted, modified, or converted back into an active (open) position,
but you can get transcripts of all closed positions according to the year in
which they were closed (refer to the Positions Transcripts Dialog on the Tools
menu).
The Portfolio Navigator is the second positions dialog in BondManager. It
differs from the Positions Dialog in that it doesn’t allow you to close,
delete, enter, or modify positions in your portfolio. Its purpose is to display positions and
summarize your portfolio at various levels.
The hierarchical display implements a folding spreadsheet whose branches
can be expanded to obtain more detail or collapsed to a summary. The example at right depicts a portfolio
containing positions in eight different bond issues. The position rows are initially invisible, so
all you see at right are the issue summary rows and the total row for all bonds
in the 
portfolio.
If you click on the
icon
next to the symbol (identifier), individual positions will be displayed above
the issue’s summary row. For example, if
you expand the ‘Ford Mtr Co Del’
and ‘Pacific Bell’ branches in the example above right, you’ll get the display
at left. Note that position rows always
appear 
above
the issue’s summary row, as you might do if you were tallying the positions for
each issue. To collapse a branch, just
click on the issue’s summary row
icon.
Row Background Colors
The summary row for the entire bond portfolio has a manila
background, symbolizing a manila folder.
Position rows have a powder blue background - hopefully alliteration
will serve as the mnemonic there. Issue
summary rows use a plain white background.
The Portfolio
Navigator treats columns slightly differently than the Positions Dialog. The columns available are Date/Name, Bonds,
Cost, MktValue, CapGain,
Income, NetGain, % Yield, Note/Desc.
Coupon income contributes to the net gain.
Net gain is the basis of the annualized yield calculation.
Date/Name and Note/Desc columns present information which depend on the row
type. Position rows, display the
purchase date in the Date/Name column and the Note you entered when you 
created
the position in the Positions Dialog in the Navigator’s Note/Desc column.
Issue summary rows
display the bond’s identifier in the Date/Name column and the description you
entered in the Bond Definition dialog in Navigator’s Note/Desc
column. Columns can be reordered using
tap and drag, but sorting is not currently available. You can use Positions List Options to prevent
some columns from being displayed. The
default is for all columns to be visible.
In this example,
the annualized yield for the portfolio as a whole is 7.828%.
Note: Purchase prices used in this example are
entirely fictional.
The Positions Transcripts dialog collects
information for all open positions or for all positions closed within a given
calendar year and presents a textual report summarizing the activity. Of
course, they are useful as journals at tax time, but transcripts also serve as
a faster means of reviewing the current state of capital gains, coupon income,
annualized yields, etc. because scrolling a plain text window is faster than
scrolling a list control and you can see the derivative data all at once so you
don’t have 
to scroll right and left to get a picture of
what’s going on.
The ‘Year Closed’ combo-box allows you to
choose between ‘Open’ and any years for which closed positions exist. If there is only one year, e.g. all positions
are active (open) or all closed positions were closed in the same year, then
that year’s positions will be loaded by default. If there are open and closed positions, Open 
positions will be loaded by default. Otherwise the most recent year’s transcript
will be loaded by default.
In the example above right, you can see the
first two journal entries from the list of open positions. Each entry
includes: an opening date, the number of bonds purchased, the bond
identifier, the description associated with the bond definition, the total cost
of the position, any note you may have created with the position, and
derivative information including capital gain, income, net gain, and the
annualized yield represented by the net gain. Coupons from the purchase
date to the present date contribute to the income figures. Portfolio totals for cost, capital gain,
income, and net gain are posted below the positions listed in the
transcript. The cost weighted annualized yield of all positions in the
transcript completes the picture.
A transcript of closed positions is shown at
right. It adds the closing date and
closing note entered at the time the position was closed to the information
associated with an open position.
The transcript displayed is not saved to a
file until you choose to do so manually.
The ‘Save Transcript’ button allows you to
save the transcript to a file, for review and editing outside BondManager and for upload to a desktop computer. The
file dialog shown below is posted after clicking the Save Transcript
button. It allows you to save the
transcript to the file name of your choosing.
The Positions Transcripts dialog traverses
the database differently than other tools in BondManager.
Other BondManager tools access positions through the
bond definition, since each tracks its own list of positions.
Positions transcripts are generated by
bypassing all of the instrument definitions and directly accessing the
portfolio positions. This approach has both tactical and strategic
advantages. From a tactical perspective, it saves CPU time (something
that should always be conserved on a Pocket-PC platform) which might otherwise
be wasted inspecting instrument definitions that don’t have associated positions.
From a strategic perspective, directly
accessing the portfolio positions enhances robustness by potentially salvaging
position information from a partially corrupted database. Hopefully,
you’ll never have to find out whether this capability actually saves your bacon
or not.
The downside of initially bypassing the
instrument definitions is that positions associated with a particular issue
won’t necessarily be contiguous in the transcript. The order in which the
journal entries appear is generally the order in which you created the
positions, except that space occupied by closed and deleted positions is
recycled by subsequently created positions. For example, if you create
twenty positions in your portfolio before deleting the second one ever created
and then create a new position, the new one will appear second when you
generate an open positions transcript. Given the benefits of efficient
CPU utilization and the potential to salvage a corrupt database, journal entry
disorder was viewed as a reasonable inconvenience. Tax agencies care more
about completeness than order, and that’s what the transcript is intended to
address.
The
Bond Analyzer provides a view of the bond’s sensitivity to market yields and
allows separation and discounting of associated coupons.
The first thing to note about the Bond
Analyzer vs. the Bond Definition Dialog is that you can’t create a bond
here. Given that the Bond Analyzer
always picks the most recently used bond in your database and displays
information for it rather than starting up with no entry in the Bond Identifier
combo-box.
The market price edit box allows you to
modify the current market price of the bond and watch how it affects various
derived information, such as current yield, yield-to-maturity, Macaulay
duration, etc. If, after modifying the
market price, you change the symbol or close the dialog, the modified price
will be saved to the database.
Current yield expresses the ratio of the
coupon amount to the current market value of the bond.
Yield to maturity is the interest rate that
produces the current market value of the bond when the par value and all of
future coupons are discounted at that rate.
Macaulay duration scales a coupon bond’s maturity
to the number of years it would mature in if it were a zero-coupon bond paying
the computed yield-to-maturity.
Obviously, the duration of a zero coupon bond is the number of years
until its maturity. The units are years
/ currency. Some sources show Macaulay
duration as a negative quantity. This is
a misconception addressed in the Glossary entry for Macaulay duration. In BondManager
Macaulay duration is always positive.
Modified duration and convexity are the
ingredients required to assess the bond’s market price under varying yield
conditions. While yield to maturity
tells you the yield for a bond priced at a certain level, ‘What-if YTM’ allows you
to reverse the process, specifying a yield and obtaining the bond value that it
imputes.
Modified
Duration
Modified duration rescales Macaulay duration
by the periodic yield to show the response that a change in interest rates will
force in the bond’s market value.
Convexity
Convexity is the degree of curvature in a
bond’s price-yield curve. It makes a
second order contribution to the Imputed Market Price. Details are discussed in the Glossary.
DeltaYTM
DeltaYTM is a user
specified quantity which drives an experimental value of the yield-to-maturity,
called the What-If YTM. The DeltaYTM combobox will accept a
floating point value entered from the keypad, but it also has percentages from
-5 to +5 in increments of 0.5 preloaded, so you don’t need to resort to the
keypad for most What-If analyses.
What-If
YTM
What-If YTM is the unlabeled quantity to the
right of DeltaYTM and the static label ‘->’. What‑If YTM is the sum of the current Yield
to Maturity and the DeltaYWM. What-If YTM is used to compute the Imputed
Market Value of the bond, and to compute the present value of par value and a
calendar range of coupons (inside the What-If YTM Discount box).
Imputed
Market Value
The Imputed Market Value displays the market
value of the bond imputed by the specified What-if YTM. Other contributing factors naturally include
the bond’s par value, maturity, coupons, and current price. The formula for imputed market value is:
|
|
C := convexity
D := modified duration
P := current market price
V := imputed market value
y := yield to maturity
 := ‘What-if YTM’ – y
|
If you leave the From and To dates at their
defaults, this section merely breaks Imputed Market Value into its first order
components, with contributions from the present value of the bond’s par value,
and from the present value of all future coupons. If convexity is zero, the sum of these
present value components will equal the Imputed Market Value. When convexity isn’t zero, you can readily
see just how much influence convexity has on the Imputed Market Value. The sum of the par’s present value and the
coupons’ present value will not equal the Imputed Market Value - the difference
can be attributed to the effect of convexity on bond value.
The Discount box also allows you to choose
other From and To dates, so you can assess the present value of coupons from
any pair of dates within the bond’s inception and maturity dates. One interesting possibility is to forward
discount the coupons that have already been paid. Note that coupons with payment dates before
the current time (as your Pocket-PC knows it) contribute more than their face
value, not less.
n
Cpns/Yr
This static string reminds you how many
coupons per year the bond pays, with n
replaced by te actual number of coupons per year paid
by the bond.
@
d.ddd %
This static string reminds you of the bond’s
coupon rate. Obviously, ‘d.ddd’ will be replaced by the appropriate numerical
digits.
From
Date
The From Date defaults to the current date,
but has a valid range from the bond’s inception date to the To Date.
To
Date
The To Date defaults to the bond’s maturity
date, but has a valid range from the To Date to the bond’s maturity date.
Present
Value Coupons
Present Value Coupons collects the present
value of all coupons within the specified date range discounted at the What-if
YTM rate. Note that it’s possible for
coupons that have already been paid to contribute to this sum. Beware that coupons that have already been
paid are ‘discounted’ at the complement of the What-if YTM rate, i.e. they
contribute more than their face value, not less.
Present
Value Par
Present Value Par is exactly analogous to
Present Value Coupons, except that it’s impossible for the par value to
contribute more than face value because its impossible to set the From or To
dates beyond the bond’s maturity date.
The Rate Sensitivity Explorer provides a
graphical view of how bond values respond to changes in yield. Bonds lose market value when interest rates
rise, and gain value when interest rates fall.
The relationship between interest rates and value is nonlinear, but over
the small (reasonable) interest rate ranges presented in the examples here, the
curves are nearly linear, though there is some curvature evident in Ford Motor Co’s rate sensitivity (red).
The
Plot
The X-axis depicts prospective changes in each issue’s yield to
maturity. The Y-axis depicts the
percentage change in the value of the bond (or portfolio) at each X-value. The bond’s current yield to maturity is represented
by the 0 point, so all curves will pass through (0,0). The colors assigned to the curves are red,
green, blue, and purple ordered from topmost symbol to bottom, e.g. Ford Motor
Co – red, Haliburton Co – green, etc. as shown in the
screenshot at right.
Plot
Enabling Checkboxes
The four checkboxes on the right side of the
dialog control whether the bond identifier currently displayed in the adjacent
combo-box will be plotted below. All
four plots are enabled in these examples.
Bond
Identifiers
The four ComboBoxes
immediately to the left of the check boxes allow you to enter a bond
identifier, by selecting the identifiers of a bond previously defined in the
Bond Definition Dialog. There are three
selection methods possible. If you’re
just interested in plotting the next issue in the list, whatever that happens
to be, you can scroll through the list of identifiers using the up/down
hardware keys. A fresh plot is generated
for every arrow-up and arrow-down key press, so this method gets you something
new to review with little effort.
However, since each plot computes the present value of all future
coupons for all enabled issues, multiple times across the X-axis, it’s a costly
mechanism for navigating a long way through the list of issues. If you need to move a long distance in the
list, the fast way is to use the drop down list and make your selection there. The upside down caret on the right end drops
down a scrollable list containing the identifiers containing all of the bond
issues you’ve defined. Of course you can
also type the bond identifier manually.
Auto-completion makes this less painful than it might otherwise be to
select one character at a time with the pen.
Portfolio
Positions must exist in the portfolio for
the Portfolio checkbox to be enabled. In
the example above right, there were no positions in the portfolio to plot and
the Portfolio checkbox is disabled.
Prior to capturing the second example at right, two positions were
created, representing 200 of the Belo Corp bonds and 100 of the Ford Motor Co
bonds. With positions in the portfolio,
the Portfolio check box is enabled. When
checked, an additional curve is plotted in black, representing the cost
weighted average rate sensitivity of all bond positions in the portfolio. Issues in the portfolio with positions are
each weighted by the cost of those positions relative to the cost of the entire
bond portfolio. Note that the portfolio’s
rate sensitivity is now 1/3 of the way between the rate sensitivities of Belo
and Ford.
‘-‘
Edit Box
The ‘-‘ edit box specifies how far below the
current yield to maturity to set the low X-value in the plot.
‘+’
Edit Box
The ‘+’ edit box specifies how far above the
current yield to maturity to set the high X-value in the plot.
Convexity is a function of the second
derivative of a bond’s market value with respect to its yield, as shown in the
box below.
|
|
c
:= coupon amount
C
:= convexity
m
:= # of coupons per year
n := years to maturity
V
:= the bond’s market value
y := yield to maturity
|
Current yield is the ratio of a year’s worth
of coupons to the current market price of the bond, expressed as a percentage.
In
the United States, the 30/360 day counting method is used for
corporate bonds, U.S. Agency bonds, and mortgage backed securities. The daily interest rate is the quoted annual
rate divided by 360. The 30/360 day
counting scheme was invented in the days before computers to make the
computations easier. For the purposes of
computation, all months have 30 days, and all years have 360 days, so tables
could be used to look up the value of accrued interest. Using the 30/360 day count, the number of days
between February 25 and March 5 is ten days, regardless of
whether it’s a leap year or not. All
months are 30 days long, so there will always be ten days between the 25th
day of any month and the 5th day of the next month.
The
Actual/360 day counting method is used for bank deposits and to calculate rates
pegged to indices, e.g. LIBOR. The daily
interest rate is 1/360 times the quoted annual rate. The number days per month is based on the
actual number of calendar days during a given month (28, 29, 30 or 31). The number of days between February 25
and March 5 will be five in most years, and six in leap years.
Actual/Actual
day counting is used for Treasury bonds and notes. The Actual/Actual day counting method is the
most intuitive of the day counting schemes.
Each year with 365 days has a daily rate equal to 1/365 times the quoted
annual rate, while leap years have a daily rate equal to 1/366 times the quoted
annual rate. The number of days per
month is based on the actual number of calendar days in each given month (28,
29, 30 or 31). The number of days
between February 25 and March 5 will be five in most years, and
six in leap years.
Macaulay duration was developed as a measure
which puts coupon and non-coupon bonds on a comparable footing. Recall that all income for a zero-coupon bond
is paid on the maturity date and the Macaulay duration of a zero-coupon bond is
the number of years until it reaches maturity.
Conversely, coupon bonds produce income prior to maturity. In order to compare zero-coupon and coupon
bonds, Frederick Macaulay proposed accumulating the weighted (by time to
maturity) future value (at maturity) of each coupon and the similarly weighted
par value, thereby allowing a coupon bond to masquerade as a zero-coupon bond.
I believe that R. J.
Donohue’s An Introduction to Cashflow
Analysis is one source responsible for fostering the
occasional misconception that Macaulay duration is negative. Donohue starts with first derivative of bond
value with respect to yield and works backward ultimately finding that Macaulay
duration is negative. I beg to
differ. Macaulay duration is a (scaled)
time weighted sum of discounted coupons and par value,
with
periodic yield 
, where m
represents the number of coupons per year.
There simply is no way that such a forward looking, time weighted sum
can produce a negative value. Modified
duration merely scales Macaulay duration by the periodic yield, so 
is also positive. Admittedly, the first derivative of bond
value with respect to yield is
negative. When you take the derivative
of bond value, 
, you get 
, or 
. The quantity inside
the brackets is 
, so 
. In summary,
|
|
c := coupon amount
m
:= # of coupons per year
n
:= # of years to maturity
P := par value
V
:= the bond’s market value
y := yield to maturity
|
Modified
duration essentially scales the Macaulay duration by its periodic yield. The practical application of modified
duration is as a first order approximation of how the bond price will change as
a function of its yield. In practice,
you’d use 
to find the effect a
yield change would have on the bond’s market value, but for accurate bond
valuation, you should also consider convexity.
|
|
 := Macaulay duration
:= the periodic
yield
m
:= number of coupons per year
V
:= the bond’s market value
y := yield-to-maturity
|
High
duration positions (or portfolios) experience greater risk of loss than low duration
positions do. Without considering the
effect of convexity, a bond with a modified duration of four years will decline
in value by four percent for a percentage point increase in interest rates. Analogously, longer duration bonds have
increased risk of loss due to rate increases.
See also: Convexity.
Yield to maturity is defined as the rate of
interest that, when used to discount a bond’s cash flows, generates the bond’s
current market price, i.e. it satisfies the following equation:
|
|
c
:= the coupon amount
m
:= number of coupons per year
n := years to maturity
P
:= the par value
V
: = the bond’s market value
y := yield to maturity
|
This expression can be solved iteratively to
find the yield to maturity, given a bond value.
Bond Screener
The
Yahoo!
Finance Bond Screener is
a terrific resource for locating bond issues of potential interest. As you can see in the screen shot at right,
you can search for corporates, municipals, and
treasuries with and without coupons and you can narrow your search to a range
of coupon rates, current yield, yield to maturity, debt rating, and whether or
not the bond is callable. Keep in mind
that BondManager doesn’t currently support analysis
of bonds with callable features.
Let’s say you hope to find an ‘A’ or better
rated corporate bond with a yield to maturity of 7% or better. You fill out the screen something like the
one at right, click ‘Find Bonds’ and … oops, at this point in time (February
2006), there aren’t any! Okay, how about
6%? This time, your input screen would
look exactly like the one at right and your results would look something like
the following screen shot indicating that there are thirty-nine candidates that
meet your search criteria. So how do you
choose?
When
you narrow the field according to yield to maturity on instruments of fairly
high quality, you tend to get candidates that perform similarly. After yield and quality, some remaining
considerations would be price of course, but time to maturity, duration, and
sensitivity to changes in prevailing market yields might also play a role in
your decision process. Price is obvious
so it needs no further support. Yahoo’s
Bond Screener will sort candidates by maturity, so you’re set there.
Duration
is the traditional bond value comparative measure. It is closely related to the first derivative
of bond value with respect to time, and Bond
Analyzer can help you narrow
the field thereby. You’ll note that the
Bond Analyzer computes Imputed Market Value for you given ‘Delta YTM’ – a pro
forma change in market yields. Imputed
Market Value is a function of modified duration and convexity. Convexity is closely related to the second
derivative of bond value with respect to time.
So, if you have an idea regarding where yields are headed, you can
scroll through bonds in your database, taking note of those most resistant to
loss of value as rates rise or those best positioned to take advantage of
falling market rates. For numerical
accuracy, Imputed Market Value in the Bond Analyzer is the way to go, but if
you’re just shopping, you may find that the Rate
Senstivity Explorer
provides the picture you need. It allows
you to visually compare the Imputed Market Value of four different issues
across a range of changes in yield.
Additionally, it allows you to compare prospective candidates with your
existing portfolio, so you can select issues that either dilute your exposure
to a change in market rates or enhance it, depending on what your crystal ball
is telling you.
[Fabozzi] Bond Markets, Analysis and Strategies, 5th
Edition
Frank J. Fabozzi. 2003 Pearson Prentice Hall.
Fabozzi’s book is
a (if not the) definitive reference on bonds.
There are plenty of examples and discussion on duration, convexity,
strips, callable and convertible bonds, mortgage-backed securities, bond
markets, swaps, futures, etc. There are
some minor typos, but the intent is usually obvious. Without qualification, I much prefer Fabozzi’s approach to the math. In particular, his presentation of pricing
under changing yield conditions (duration, convexity, etc.) is superior to
Farrell’s or anybody else I’ve read so far.
[Farrell]
Portfolio Management, Theory and Application, 2nd Edition
James L Farrell, Jr. 1997 McGraw-Hill Companies, Inc.
Farrell doesn’t provide as many formulas
(thus leaving himself less exposed to errors) or revisit them in as many ways
as Fabozzi does, but this book has the advantage of
covering portfolio theory and working valuation models at a lower level than
you’ll typically find in a book on portfolio management, so it’s a nice overall
introduction to the subject matter for the uninitiated. It’s also a nice complement to Hull’s book,
which doesn’t venture into portfolio theory, but if you’d rather pass on that
and focus on on yield curves, strips, and other fixed
income issues, you’re better off moving up to Fabozzi.
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