Bond TVM Question


I’m having some trouble conceptualizing if we should be doing inflows or outflows for the PV, PMT, and FV.

I have gotten the correct calculation by doing
PV= + 1000 , PMT= + 40 , and FV= - 900

Which yields a negative IR. Is this normal? Should I put inputting the inflows and outflows in a different way to receive a positive IR?

The TVM buttons are cash flow buttons.

If you look at the question from the issuer’s point of view, the PV is positive (an inflow: they’re selling the bonds), the PMT is negative (and outflow: they’re paying the coupons), and the FV is negative (an outflow: they have to pay off the bonds at maturity).

If you look at the question from the bondholder’s point of view, the PV is negative (an outflow: they’re buying the bonds), the PMT is positive (and outflow: they’re receiving the coupons), and the FV is positive (an outflow: they’ll receive the par value at maturity).

Either point of view is appropriate. I encourage you to decide on a point of view (Right now! Why are you waiting?) and always use that point of view; you’ll save yourself a lot of time and aggravation.

The problem here is that you have the PV and FV wrong; the cash flow today is 900, and the cash flow at maturity is 1,000. Additionally, the sign on PMT has to be the same as the sign on FV; see the paragraphs above.


N.B.: You also have to be careful how you set P/Y and C/Y in the calculator. For P/Y=C/Y=1, you will get I = 5.3149, but if you set P/Y=C/Y=2, you will get I = 10.62985.

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That is perfect, I completely understand now!

Thanks S2000! :grin:

My pleasure.

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