![]() We have already identified the cash flows above. The required rate of return ( discount rate) that is appropriate given the riskiness of the cash flows.The value of any asset is the present value of its cash flows. This will be important because we are going to use the time value of money keys to find the present value of the cash flows. In either case, the next payment will occur in exactly six months. We will begin our example by assuming that today is either the issue date or a coupon payment date. We will use this bond throughout the tutorial. Therefore, the time line looks like the one below: Finally, the $1,000 will be returned at maturity (i.e., the end of period 6). However, the annual interest is paid in two equal payments each year, so there will be six coupon payments of $40 each. ![]() The bond will pay 8% of the $1,000 face value in interest every year. The bond has three years until maturity and it pays interest semiannually, so the time line needs to show six periods. Let's look at an example:ĭraw a time line for a 3-year bond with a coupon rate of 8% per year paid semiannually. Bond Cash FlowsĪs noted above, a bond typically makes a series of semiannual interest payments and then, at maturity, pays back the face value. You may also be interested in my tutorial on calculating bond yields using the HP 10B or 10BII. If you aren't comfortable doing time value of money problems on the HP 10B or HP 10BII, you should work through those tutorials first. ![]() If you aren't familiar with the terminology of bonds, please check the Bond Terminology page. The purpose of this section is to show how to calculate the value of a bond, both on a coupon payment date and between payment dates. bonds typically pay interest every six months (semi-annually), though other payment frequencies are possible. ![]() Most commonly, bonds are promises to pay a fixed rate of interest for a number of years, and then to repay the principal on the maturity date. Are you a student? Did you know that Amazon is offering 6 months of Amazon Prime - free two-day shipping, free movies, and other benefits - to students? Click here to learn moreĪ bond is a debt instrument, usually tradeable, that represents a debt owed by the issuer to the owner of the bond. ![]()
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