R Tutorial: Convert your code into a function

Key Takeaways

you're going to value many bonds in the rest of this course using the same steps we outlined in the previous set of exercises to simplify this process it makes sense to create a bond valuation function this way you limit the possibility of making mistakes as you don't need to keep rewriting multiple lines of code each time you value a bond we still keep the step by step approach from before but this time we have to generalize the inputs so the function can value bonds with different coupons and maturities the first thing we do is to use variable names instead of actual values so we use P for par value instead of say $100 we use R for the coupon rate instead of say 5% or 0.05 we use TTM for time to maturity instead of say 5 years we use Y for yield instead of say 4% these variables P R T TM and Y are the required inputs by the bond valuation function the code is also modified to make some of the steps more generic now let's go through each of these steps to see what we changed the first step is to construct a cash flow vector CF for the cash flow vector CF we need to allow the code to be flexible and generate the coupon payments and principle payment automatically given the bonds par value coupon rate and time to maturity we use the rep command which takes two inputs x and y it basically repeats y times the value of x this fits how we model the coupon payments prior to maturity so X is equal to the par value times the coupon rate and Y is equal to the time to maturity minus 1 then the cash flow vectors final element should equal the last coupon payment plus principal mathematically this is equivalent to the par value times 1 plus the coupon rate our the next step is to convert the CF vector into a data frame so we can add variables to the data this is similar this step we used in the last section next we create a time index T to automate this process we need to find an object that has values equal to 1 2 3 4 etc until the time to maturity of the bond fortunately the label of the rows of the cashflow vector CF fits this purpose so using the row names command we can extract those values and put them into the in time index T variable then to ensure that the values are read in as numbers we use the as numeric command the last three steps are similar to the discussion in the last section when we did a step by step valuation first we calculate a present value factor PV factor next we calculate the present value of each cash flow PV by multiplying each cashflow by the appropriate pv factor finally we sum the present value of each cash flow to arrive at the bonds value the final step in the function writing process is to wrap the code with one line at the beginning and another line at the end in the first line we setup the bond valuation function bond PR C the first line of code shows the bond PR C function takes as inputs P R T TM and Y the first line ends with an open curly brace after which we see the six lines of bond valuation code we discussed previously finally we add the last line of the code below which is simply a close curly brace to end the function this completes our bond valuation function now it's time for you to create your own bond valuation function let's practice