CP

(4-1)

Inserting values for our particular bond, we have

Note that the cash flows consist of an annuity of N years plus a lump sum payment at

the end of Year N, and this fact is reflected in Equation 4-1. Further, Equation 4-1 can

be solved by the three procedures discussed in Chapter 2: (1) numerically, (2) with a fi-

nancial calculator, and (3) with a spreadsheet.

NUMERICAL SOLUTION:

Simply discount each cash flow back to the present and sum these PVs to find the

bond’s value; see Figure 4-1 for an example. This procedure is not very efficient, espe-

cially if the bond has many years to maturity. Alternatively, you could use the formula

$100(PVIFA10%,15)$1,000(PVIF10%,15).

$100

°

1 

1

(1.1)^15

0.1

¢



$1,000

(1.1)^15

VB
 a

15

t
 1

$100

(1.10)t



$1,000

(1.10)^15

INT(PVIFArd,N)M(PVIFrd,N).

INT

°

1 

1

(1rd)N

rd

¢



M

(1rd)N

a

N

t
 1

INT

(1rd)t



M

(1rd)N

Bond’s value
VB

INT

(1rd)^1



INT

(1rd)^2

.^.^ .

INT

(1rd)N



M

(1rd)N

Bond Valuation 157

FIGURE 4-1 Time Line for MicroDrive Inc.’s Bonds, 10% Interest Rate

1 234 567891011121314 15
Payments 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 1,000
90.91
82.64
75.13
68.30
62.09
56.45
51.32
46.65
42.41
38.55
35.05
31.86
28.97
26.33
23.94
239.39

1,000.00 where rd
10%.
Present
Value

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Bonds and Their Valuation 153