When doing bond questions, I am always confused whether to set PV=0 or not, for example: A firm has $3 million in outstanding 10-year bonds, with a fixed rate of 8 percent (assume annual payments). The bonds trade at a price of $92 per $100 par in the open market. To calculate the required return, you do this: PV -92, N10, FV100, PMT 8 compute I/Y … Now, if we look at this question: An investor purchases a $1,000 par value accrual bond with a 3-year maturity. The bond pays 5% interest compounded semiannually at the bonds maturity. Calculate the amount that will be received on maturity. The answer is 1[2nd][N], 6[N], 2.5[I/Y], 25[PMT], 0[PV], [CPT][FV] = 159.69 So PV is set as 0 here…I don’t know what’s the difference? I thought the investor put down money today in both situations? Thanks for answering!
the second example is only asking for the amount that will be received at maturity (so it doesn’t matter what the PV of the bond is or what you paid for it)
so you mean, if the 2nd question is asking for actually FV(not the amount of cash received in the end), the PV should not be 0? Sorry i’m still confused…
okay, let me try again. The second question states that it’s an accrual bond that pays at the bond’s maturity (you don’t receive your coupon payments until the end), so this makes it a bit different than a normal calculation. Normally, you will just receive par at maturity. The question is really just asking for the amount of accrued interest that you will receive at maturity. So you could do the calculation with PV = -1000 PMT = 0 I/Y = 2.5 N = 6 cpt FV --> 1159.69 but subtract your principle payment from that, and you’re left with the accrued interest of 159.69 Does that make sense?
Yes that’s clear now, thanks a lot