Computing Bond Values to Teach Time Value of Money Principles

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.