There are two components to calculating the present value of a bond. The first is the present value of future principal payments. The second is the present value of future interest payments. The first component needs the present value of a dollar and the second component needs the present value of an annuity at $1. The present value factors are easiest to find on a present value table.
Things You'll Need
- Present value of $1 Table
- Present value of an ordinary annuity at $1 Table
Separate the information of the bond into needed information. The calculation requires the principal amount, the interest payments, the interest rate, and the number of payments. For example, a bond has principal of $1 million and interest payments due semi-annually of $50,000 and pays interest of 14%, or 7% semi-annually. In total, there will be ten payments.
Multiply the interest payments by the present value of an ordinary annuity at $1 factor. This factor is found on the table by finding 6% on the interest column and ten terms on the row column. In the example, $50,000 * 7.02358, which equals $351,179.
Multiply the principal payments by the present value of a $1 factor. In the example, $1 million * 0. 50835, which equals $508,350.
Add the present value of future principal payments and present value of future interest payments together to arrive at the bond's value. In the example, $351,179 plus $508,350 equals $859,529.
- Photo Credit calculator image by L. Shat from Fotolia.com
How to Calculate a Coupon Payment
A coupon payment is a semiannual payment from a bond investment. The amount of the payment depends on the interest rate for...
How to Calculate the Present Value of a Bond
This article explains how to calculate the present value of a bond using several factors. A easy process using Excel is presented.
How to Calculate Interest Payments on Bonds
Bonds are debt instruments sold by corporations and government agencies to raise money. Bond issuers calculate interest payments in accordance with the...
How to Calculate Bond Payment
Companies issue bonds as a method of raising money for corporate purposes without diluting the company's ownership. Bonds function very similarly to...
Bond Prices: Annual Vs. Semiannual Payments
Many factors affect bond prices including the market interest rate, the remaining years to maturity, the amount of coupon payments and the...
Adjusting Entries for Accrued Interest on Bonds
Companies issue bonds to raise funds. Bond investors receive regular interest payments and get their original investment back on maturity. Bonds usually...