Question
Using the PV / FV tables AND the Bond&IntRateRelationship document attached , create YOUR OWN example of how to calculate the present value of a
Using the PV / FV tables AND the "Bond&IntRateRelationship" document attached , create YOUR OWN example of how to calculate the present value of a bond by addressing the following points:
1. What is the principal payment at maturity (i.e. the face value)?
2. What is the annual interest payment (coupon rate in dollars)?
3. What is the yield to maturity rate (i.e. the market interest rate)?
4. How many years until the bond matures (make it different from other students)?
5. What discount factors should be used from PV / FV table posted in Canvas?
Now calculate the PV of the bond (i.e. the sell price of the bond). Be specific and provide ALL necessary detail to support your calculations.
1. Bond Valuation 1.1. Terminology 1.1.1. Principal payment at maturity = par value = face value: amount the bond is worth at maturity as stated on the bond certificate 1.1.2. Coupon rate: stated interest rate as seen on the bond certificate 1.1.3. Yield to maturity = discount rate = required rate of return: return a bondholder expects to receive to buy the bond - expected rate of return the investor expects to receive for loaning their money 1.2. The see-saw affect: the relationship between bond interest rates and prices Yield to Maturity or Required Rate of Return - greater than coupon if discount price Coupon rate Yield to Maturity or Required Rate of Return - less than coupon if premium price Bottom line, in times of rising interest rates, bond prices will decrease; in times of declining interest rates, bond prices will increase. There is an inverse relationhip
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