CP

in the third row of Equation 4-1 with a simple or scientific calculator, although this

would still be somewhat cumbersome.

FINANCIAL CALCULATOR SOLUTION

In Chapter 2, we worked problems where only four of the five time value of money

(TVM) keys were used. However, all five keys are used with bonds. Here is the setup:

Inputs: 15 10 100 1000

Output: 
1,000

Simply input N 
15, I 
rd
10, INT 
PMT 
100, M 
FV 
1000, and then

press the PV key to find the value of the bond, $1,000. Since the PV is an outflow to

the investor, it is shown with a negative sign. The calculator is programmed to solve

Equation 4-1: It finds the PV of an annuity of $100 per year for 15 years, discounted

at 10 percent, then it finds the PV of the $1,000 maturity payment, and then it adds

these two PVs to find the value of the bond. Notice that even though the time line in

Figure 4-1 shows a total of $1,100 at Year 15, you should not enter FV 
1100! When

you entered N 
15 and PMT 
100, you told the calculator that there is a $100 pay-

ment at Year 15. Thus, the FV 
1000 accounts for any extrapayment at Year 15,

above and beyond the $100 payment.

SPREADSHEET SOLUTION

Here we want to find the PV of the cash flows, so we would use the PV function. Put

the cursor on Cell B10, click the function wizard then Financial, PV, and OK. Then

fill in the dialog box with Rate 
0.1 or F3, Nper 
15 or Q5, Pmt 
100 or C6,

FV 
1000 or Q7, and Type 
0 or leave it blank. Then, when you click OK, you will

get the value of the bond, $1,000. Like the financial calculator solution, this is neg-

ative because the PMT and FV are positive.

An alternative, and in this case somewhat easier procedure given that the time line

has been created, is to use the NPV function. Click the function wizard, then Finan-

158 CHAPTER 4 Bonds and Their Valuation

A B CDE F GH I JK LMNO PQ

1 Spreadsheet for bond value calculation

(^2) Going rate,
3 Coupon rate 10% or yield 10%
4
5 Time 0123 4567 89101112131415
6 Interest Pmt 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
7 Maturity Pmt 1000
8 Total CF 100 100 100 100 100 100 100 100 100 100 100 100 100 100 1100
9
10 PV of CF 1000

154 Bonds and Their Valuation