How is it that my calculator is not calculating the right answer?
Question is: what value woudl an investor place on an 20-year, $1,000 face value, %10% annual coupon bond, if the investor required a 9% rate of return?
Answer: 1091
I’ve entered this a million times and keep getting 734.423677… I’ve 2nd clr tmv several times so I’m not sure what is going on…
N=20, I/Y=9%, PMT=100, FV=1000, solve for PV and get -$1,091.29
Be careful with your signs! PMT and FV signs should match. If you mix them up, you get your $734.42.
Also, think it through logically - a bond paying 10% when rates are at 9% should be selling at a premium!
Thanks! I got the right answer with the logic in your second point but was concerned I wasn’t able to get the right answer on my calc. Didn’t know PMT and FV had to be the same signs…
Think of PV as an outflow (you’re paying to buy the bond) so keep it negative. FV and PMT are both inflows (coupon payment and return of principal at maturity) so I keep them positive.
The PV/FV/PMT buttons are cash-flow buttons.
I tell my candidates that they should pick a point of view on these questions, lender or borrower, and always – _ always! _ – use that point of view.
If you take the point of view of the lender, then PV is negative (it’s an outflow), and PMT and FV are positive (they’re inflows).
If you take the point of view of the borrower, then PV is positive (it’s an inflow), and PMT and FV are negative (they’re outflows).
It doesn’t matter which point of view you take, but decide on one and stick with it.
Thanks!
You’re quite welcome.