How to Calculate Bonds With a Financial Calculator
Every banker owns a financial calculator. She carries the calculator with her to every meeting because she never knows when she may need it and no other calculator can do the work of a financial calculator.
The most popular financial calculators are the Hewlett-Packard HP-10B and the Texas Instruments BA II. However, all financial calculators have the same basic functions.
Ways to Calculate Bonds With a Financial Calculator
Define Your Variables
The hardest part about using a calculator is knowing which variables to input. Let’s walk through an example to help illustrate.
Let’s say you need to find the bond price for a company that issued 11 year, semi-annual bonds one year ago at a coupon rate of 8.25 percent. The yield to maturity (YTM) on the bonds is 7.10 percent.
Assign Your Variables a Label That Matches Your Calculator
The main labels are payment amount (PMT), future value of the bond (FV), number of periods (N), and interest rate (I/Y). PMT is the amount the bonds pay. The bonds pay semi-annual so you need to divide the coupon by 2.
This is 8.25/2 = 4.125. Multiply this by the par value to get the payment. The payment is 41.25 (.04125 x $1,000). The number of periods is 20 (two, 10-year periods). The par value is assumed to $1,000 which is the FV and the interest rate is 3.55 (7.1/2).
Plug These Values Into The Calculator and Click PV or CPT PV for The Price
The price should be $1,081.35.
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