Bond Valuation

Interest = 9%

Semi annual coupon rate = 4%

FV = 5 million

N = 10 years

PV with 10 year horizon is 4,674,802.

When I compute the value for this bond 7 years from today, I did 4,674,802*(1.045)^14, but somehow this is the wrong answer. Isn’t it merely just sliding the present value 7 years into the future?

PV=-4674802 (INflow, so negative)

N=14

PMT=-5000000*0.04=200000 (outflow, positive)

I/Y=4.5%

CPT FV

4871054?

Because there are coupons being paid.

Try this:

  • PV = -4,674,802
  • PMT = 200,000
  • i = 4.5%
  • n = 14
  • Compute FV = 4,871,053

You’re part way to the bond value by rolling up the $4,674,802: you also have to deduct the accumulated value of coupons paid to date. This is known as retrospective accumulation.