Page 201 - A Canuck's Guide to Financial Literacy 2020

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Bonds that are priced below $1,000 are said to be trading at a discount. Bonds priced
above $1,000 are said to be trading at a premium. Bonds priced at $1,000 are said to be
trading at par.

Calculating Bonds

The quickest and easiest way to calculate a bond is to use a financial calculator. On the
financial calculator, you’ll have the following inputs:

FV = Future Value or Principal Value of the Bond
PMT = Periodic Payments (Coupon Rate)
N = Number of Outstanding Interest Payments
I = Interest Rate

Finding the Purchase Price

A $5,000 bond pays interest at 6% semi-annually and is redeemable at par at the end of 10
years. What is the purchase price if the bond pays 10% compounded annually?

A $5,000 bond pays interest at 6% semi-annually and is redeemable at par at the end of 10
years. What is the purchase price if the bond pays 10% compounded annually?

Using a financial calculator, calculate the present value of the redemption price. Note that
P/Y/C/Y is 2 as the bond pays interest semi annually.

• P/Y = 2
C/Y = 2
FV=$5,000
N= 10 X 2 = 20
I/Y = 10
• PV = -1884.44

Step 2 – Calculate the Present Value of the Interest Payments

• PMT = 5000 * 0.06/2 = $150
P/Y = 2
C/Y = 2
FV = 0