The value of any financial asset is the present 3 value of the cash flows the asset is expected to produce. For a bond with fixed annual coupons, its value is equal to the present value of a its annual interest payments and its maturity value as shown in the equation below INT INT. Bond's value V We could use the valuation equation shown above to solve for a bond's value; however, it is more efficient to use a financial calculator. Simply enter N as years to maturity, I/YR as the going annual interest rate, PMT as the annual coupon payment (calculated as the annual coupon interest rate times the face value of the bond), and Fv as the stated maturity value. Once those inputs are entered in your financial calculator, you can solve for Pv, the value of the bond. Remember that the signs for PMT and Fv should be the same, so Pv wil have an opposite sign. Typically, you would enter PMT and Fv as positive numbers, so PV would be shown as a negative value. The negative sign means that you are purchasing the bond, so the purchase price of the bond is paid out of your funds (thus the negative sign) and is received by the issuing firm (a positive flow to the firm). Note that we calculated the bond's value assuming coupon interest payments were paid annually; however, most bonds pay interest on a semiannual basis. Therefore, to calculate the value of a semiannual bond you must make the following changes N should renect the number of interest payment periods so multiply years to maturity times 2, IAR should reflect the periodic going rate of interest so divide the going annual interest rate by 2, and PMT should refect the periodic interest payment so dvide the annual interest payment by 2 For fixed-rate bonds it's important to realize that the value of the bond has atn seleet relationship to the level of interest rates. interest rates rise, then the value of the bond Selee however, if interest rates fall, then the value of the bond Gseieet D AGseieet- bond is one that sells below its par value. This situation occurs whenever the going rate of interest is above the coupon rate, over its value O approaching ts maturity value at maturity. AGSelect bond is one that sels above its par value. This situation occurs whenever the going rate time will select of interest is below the coupon rate. over time its value willGselect approaching its maturity value at maturity, A par value bond is one that sels par the bonds coupon rate is equal to the at going rate of interest. Normally, the coupon rate is set a the going market rate the day a bondisissued so it sells at par intially