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Computing Bond Values to Teach Time Value of Money Principles

Author

Listed:
  • 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.

Suggested Citation

  • Carl B. McGowan & Donald T. Joyner, 2015. "Computing Bond Values to Teach Time Value of Money Principles," Applied Finance and Accounting, Redfame publishing, vol. 1(2), pages 64-72, August.
    • Handle: RePEc:rfa:afajnl:v:1:y:2015:i:2:p:64-72
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    More about this item

    Keywords

    Time value of money; bond valuation; premium bond; discount bond;
    All these keywords.

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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