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.
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