Page 61 - CFA - Day 1 & 2 Course Notes

LOS 6.e: Calculate and interpret the future Session Unit 2: The Time Value of Money
value (FV) and present value (PV) of a single
sum of money, an ordinary annuity, an annuity

due, a perpetuity (PV only), and a series of
unequal cash flows. A bond will make coupon
interest payments of 70 euros
Example: PV of a bond’s cash flows (7% of its face value) at the
end of each year and will also

pay its face value of 1,000
euros at maturity in five years.

If the appropriate discount rate
is 8%, what is the present
value of the bond’s promised

cash flows?

Answer: The calculator solution is:

N = 5; PMT = 70; I/Y = 8; FV = 1,000; CPT PV = –960

Note that the PMT and FV must have the same sign, since both are cash flows paid to the

investor (paid by the bond issuer). The calculated PV will have the opposite sign from PMT
and FV.