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
IMG: Financial Supply Chain Management -> Treasury and Risk Management -> Basic Functions -> Market Data Management -> Master Data ->
Check Reference Interest Rates -> Define Reference Interest Rate
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
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
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:
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.
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
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.
FRt0: Forward Rate Interest T0
FZBDF: Forward Zero Bond Discount Factor
Ie:
Validate with trx JBYC
Risk Hierarchy
Create Risk Hierarchy (trx JBRR) for Analysis in NPV (trx JBRX) and a Node with Risk Type “Yield Curve”
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.
If the “Horizon” equals the “Valuation Date” data is obtained from trx OB83 , if not it is calculated with Forward Rate.
ie:
CashFlow
Excel
trx: JBRX
in case you add scenario and calculates based on yield curve
Calculation of NPV through MS Excel NPV function
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:
Beautiful document, Thanks for sharing.
Cheers,
Jain
Thanks Jain 🙂
Excellent information, very useful. Do you have some similar documents for calculations of Value at Risk, Sensitivity Analysis, FX Exposure and GAP Analysis. Thanks
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
Hello Gustavo,
I did not succeed to download your excel file ?
Could you please send it to me ?
Thank you for sharing
Regards
Nicolas
give me your mail. I had uploaded them in old scn site, but with sap community attachments are not available anymore
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
Hi Billy  ,
No, I haven’t work in that.
Kind Regads