# Government of Canada Securities - Technical Guide

## Determining Bond and Treasury Bill Prices and Yields

### Bonds

In general, there are two parameters that are needed to describe fully the cash flows on a bond. The first is the maturity date of the bond, at which time the principal, or face amount of the bond is paid and the bond retired. The second parameter need to describe a bond is the coupon rate. A Government of Canada bond issued in the domestic market pays one-half of its coupon rate times its principal value every six months up to and including the maturity date. Thus, a bond with an 8 per cent coupon maturing on December 1, 2005 will make future coupon payments of 4 per cent of principal value on each June 1 and December 1 between the purchase date and the maturity date.

The price of the bond is found by discounting future cash flows back to their present value as indicated in the following formula:

where

P = current price

N = number of semi-annual periods

y = yield to maturity (expressed in percentage points). The yield is divided by 200 to convert the yield to a percentage on a semi-annual basis.

CF = cash flow in a given semi-annual period (coupon⁄2) and at maturity (coupon⁄2) + 100

## MarketConvention for Quoting Bond and Treasury Bill Prices and Yields in the Secondary Market

### Bonds

Bond prices are quoted as a percentage of the bond's par or face value and exclude accrued interest; e.g. if a nominal fixed coupon bond is quoted as 101.59, then the price of that bond is 101.59% or 1.0159 times the value of the bond at maturity.

When an investor buys a bond between coupon payments, the investor must compensate the seller of the bond for the coupon interest earned from the time of the last coupon payment to the settlement date of the bond. This amount is called accrued interest. Accrued interest for Government of Canada bonds are calculated as follows:

 C/2 actual number of days from the last coupon payment to settlement date actual number of days in coupon period

where C = coupon payment

The market convention for calculating accrued interest on Government of Canada bonds is known as actual over 365 basis, which considers a year to have 365 days.

Bond yields are quoted as the yield to maturity; i.e. the quoted yield is the yield necessary to make the present value of the bond's cash flow equal to the current market price. However, as previously mentioned, the quoted price and, consequently, the quoted yield-to-maturity excludes accrued interest. Therefore, the yield-to-maturity is determined by solving for y in the following equation:

where

P = current price

N = number of semi-annual periods

y = yield to maturity (expressed in percentage points). The yield is divided by 200 to convert the yield to a percentage on a semi-annual basis.

CF = cash flow in a given semi-annual period (coupon⁄2) and at maturity (coupon⁄2) + 100

### Treasury Bills

The convention in Canada is to quote Treasury bills in yield terms. . The yield is calculated as follows:

where

Y = quoted value

F = face value of the Treasury Bill

P = price

t = actual number of days remaining to maturity

The price of the Treasury bill can be determined by rearranging the above equation and solving for (F-P)⁄P and then given F, solving for P.

### Resources

Investment Industry Association of Canada: Canadian Conventions in Fixed Income Markets [PDF 295.99 Kb]