![]() Keep this in mind as it will be a key fact in the next section. In either case, at maturity a bond will be worth exactly its face value. Both lines assume that market interest rates stay constant. The red line shows how a bond that is trading at a premium will change in price over time. In the chart below, the blue line shows the price of our example bond as time passes. A bond selling at a premium to its face value will slowly decline as maturity approaches. This discount must eventually disappear as the bond approaches its maturity date. Notice that the bond is currently selling at a discount (i.e., less than its face value). Please see the Initial Setup section of the HP 10B tutorial for how to correct this problem.) (If you get $1,213.29 instead, then you have the calculator set to assume monthly compounding. Now, press PV and you will find that the value of the bond is $961.63. We can calculate the present value of the cash flows using the TVM keys. The TVM keys on the HP 10B or 10BII can handle this calculation as we will see in the next example:Īssuming that your required return for the bond is 9.5% per year, what is the most that you would be willing to pay for this bond? We don't have to value the bond in two steps, however. Adding those together gives us the total present value of the bond. Using the principle of value additivity, we know that we can find the total present value by first calculating the present value of the interest payments and then the present value of the face value. The face value is a $1,000 lump sum cash flow. Notice that the interest payments are a $40, six-period regular annuity. Take a look at the time line and see if you can identify the two types of cash flows. We have already identified the cash flows above.
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