Computing Bond Values to Teach Time Value of Money Principles

Carl B. McGowan, Donald T. Joyner

Abstract


The objective of this paper is to demonstrate how to use bond valuation to teach students how to use a financial calculator. In this paper, a single bond issuance is examined using three different yields to maturity (i.e. market rates). The present values of a $1000 bond issue, valued with five years to maturity and a ten percent coupon rate, are determined using three different yields to maturity: 8% (which would result in a premium), 10% (which would result in neither a discount nor a premium), and 12% (which would result in a discount). The present value of the bond is determined by calculating the present values of both the coupon payment stream (an annuity) and the maturity value (present value of a lump sum) given three different situations. All three values are determined for each year as the time to maturity decreases. A discount (premium) from a change in the YTM is reduced each year until maturity. The results are shown in tables and graphed in Figure 2.


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DOI: https://doi.org/10.11114/afa.v1i2.862

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Applied Finance and Accounting (AFA)        

ISSN 2374-2410(Print)           ISSN 2374-2429(Online)

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