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This document is for an explanation of SAP TRM Market Risk Analyzer – Net Present Value for Yield Interest Rate from the End User perspective.

For configuration refer to Risk Analyzers | Gopa Kumar S or SAP Service Marketplace – SAP Treasury and Risk Management Building Block Y26

SAP TRM-MR calculates NPV based on yield interest curves.

MS Excel calculates NPV by using a discount rate and a series of future payments (negative values) and income (positive values).

SAP uses Zero Bond Discount Factor (ZBDF) to calculate NPV Values. SAP Notes 105693, 110812, 204331 gives some information on the logic.

Reference Interest Rate:

A reference interest rate is an interest rate to which the contract interest rate refers in the condition items. It is adopted directly as contract interest rate in the context of variable interest calculation or used as part of the formula for the calculation of the contract interest rate.


IMG: Financial Supply Chain Management -> Treasury and Risk Management -> Basic Functions -> Market Data Management -> Master Data -> Check Reference Interest Rates

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IMG: Financial Supply Chain Management -> Treasury and Risk Management -> Basic Functions -> Market Data Management -> Master Data ->

Check Reference Interest Rates -> Define Reference Interest Rate

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Yield Category: The yield category specifies reference interest rates and yield curves.

  The following yield categories are available:

            • Par rate (annual distribution)
            • Zero bond yield (distribution at the end of the term)

Currency:   Currency for the Interest

Int Calc. Method: Interest Calculation Method

Quotation Type: Middle, Bid Ask

Unit of Time: Time Dimension

Term: Terms in the Unit of Time

Foward YC Type: The calculation of a forward rate for a reference interest rate is based on the assigned forward curve type.

Yield Curve:


A yield curve type contains one yield curve structure for each different currency. On the validity date, the yield curve structure generates a yield curve, which serves as the basis for NPV calculation.

IMG: Financial Supply Chain Management -> Treasury and Risk Management -> Basic Functions -> Market Data Management -> Master Data ->

Check Reference Interest Rates -> Define Yield Curve Type

08-06-2016 11-38-48 a.m..png

Yield Category: The yield category specifies reference interest rates and yield curves. Same as Reference Interest.

Interpolation Procedure: It determines which method is used to calculate missing grid points using existing reference interest rates. The following interpolation procedures are supported. Function: ISB_CONVERT_PAR_TO_ZBAF

      • Linear interpolation. – perform  zbaf_bis_360 -.
      • Cubic spline interpolation: With cubic spline interpolation, third-degree polynomials are used for the interpolation. – perform  zbaf_ab_360 -.

Select Currency and click on Detail icon

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Select the appropriate “Int.Calc.Method” and add “New ref, Interest rate” as needed. You can have more than 1 if they have different periods.

ie:

08-06-2016 11-54-26 a.m..png

Zero Bond Discount Factor

Zero Bond Discounting Factors{} – Price Calculator for Financial Instruments – SAP Library

It is the Discount factor of a loan/investment as if all interest and repayment is done at the end of life of the transaction.

                   /wp-content/uploads/2016/06/ppt_img_970591.gif

Pt: Interest Rate

dt:  Days

bt:  Base Days

The zero bond discounting factors are used, among other things, for the following purposes:

  • Base amount for calculation of the margin net present value
  • Base amount for calculation of the similarly structured opportunity interest rate

You use zero bond discounting factors especially when the yield curve is not flat. The ZBDFs are determined from interest rates sequentially, meaning from the cumulated ZBDFs of the previous years. The matched maturities-valuation of a cash flow requires duplication of the cash flow course of a financial instrument (specified by the payment amount and time) using various other financial instruments.

Example:  trx JBYC

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In case the Int Method between the Yield Curve (YC Type) and the Reference Interest Rate is different, you will need to convert from one method to another before calculating ZBDF.

Forward Rates


Forward Rates – Price Calculator for Financial Instruments – SAP Library


Forward rates or implied forward rates are interest rates for transactions that are in the future but that are determined by a current yield structure curve.


          /wp-content/uploads/2016/06/ppt_img_970591.gif                                                                   ppt_img (1).gif

  FRt0:     Forward Rate Interest T0

  FZBDF: Forward Zero Bond Discount Factor


Ie:

08-06-2016 12-10-38 p.m..png


Validate with trx JBYC


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Risk Hierarchy

Create Risk Hierarchy (trx JBRR) for Analysis in NPV (trx JBRX)  and a Node with Risk Type “Yield Curve”

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NPV Margin

NPV margin – Profitability Analysis – SAP Library

The net present value margin (NPV margin) is the value that results when a cash flow is discounted to a defined point in time, (the market interest date). The NPV margin of a transaction corresponds to the total of the NIM contributions discounted to the market interest rate date. For transactions with fixed cash flows, the NPV margin is calculated by discounting the payments from the cash flow using the zero bond discounting factors (ZBDF) for the defined date.

/wp-content/uploads/2016/06/ppt_img_970591.gif

If the “Horizon” equals the “Valuation Date” data is obtained from trx OB83 , if not it is calculated with Forward Rate.

ie:

CashFlow

08-06-2016 12-32-15 p.m..png

08-06-2016 12-33-10 p.m..png


Excel

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trx: JBRX

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in case you add scenario and calculates based on yield curve

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Calculation of NPV through MS Excel NPV function

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Conclusion:

There is not much difference between SAP and MS Excel method (1019,68 vs 1019,91) but numbers are not the same.

You could find results similar if

  • Interest Rate is same across all periods
  • Interest is payed fully at the end of life
  • Repayment is done at the end

If conditions differ, only Excel XNPV function will approach to SAP NPV.

Attached are 2 Excel files, one with the results and the other (en_XML) with formulas.

ie:

09-06-2016 10-36-29 a.m..png

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8 Comments

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        1. Gustavo Vazquez Post author

          HI Marco,

          Sorry, I did this document as it was a customer requirement.

          I have no business scenario to replicate with other subjects.

          Kind Regards

          (0) 
  1. Nicolas DENET

    Hello Gustavo,

    I did not succeed to download your excel file ?

    Could you please send it to me ?

    Thank you for sharing

    Regards

    Nicolas

    (0) 
  2. Billy Zhang

    Hi, Gustavo:

    Good job, very helpful.

    And we’re maintain Basis Spread and Credit Spread, which will effect NPV result.

    Do you have any research on that part?

     

    BRs

    Billy

     

    (0) 

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