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Present Value of Bonds

Lesson
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When bonds are first sold, or issued, they need a price.

Fortunately, the price is the result of two types of calculations that you likely already know:

  • Present value of a sum - This represents the money invested, that will be returned at the end of the time period.
  • Present value of an annuity - This represents the money that will be paid on each payment date.

Even though it seems simple, many students get confused when deciding which interest rates to use in which parts of the problem.

  • Bond interest rate - Used to calculated the dollar value of the payment at the end of each period.
  • Market interest rate - Used for everything else.
Question Frank inc., the mysterious computer vendor, bought a bond for $100,000.00 with a 5 year duration. The bonds pay 5% at the end of each year, and the market rate of interest is 6%.
  • The present value factor for an annuity due at 5% for 5 years is 4.54595.
  • The present value factor for an ordinary annuity at 5% for 5 years is 4.32948.
  • The present value factor for an annuity due at 6% for 5 years is .
  • The present value factor for an ordinary annuity at 6% for 5 years is 4.21236.
What is the present value of the bond?
Answer