{"appState":{"pageLoadApiCallsStatus":true},"articleState":{"article":{"headers":{"creationTime":"2016-03-26T12:57:49+00:00","modifiedTime":"2016-03-26T12:57:49+00:00","timestamp":"2022-09-14T18:04:14+00:00"},"data":{"breadcrumbs":[{"name":"Business, Careers, & Money","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34224"},"slug":"business-careers-money","categoryId":34224},{"name":"Business","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34225"},"slug":"business","categoryId":34225},{"name":"Accounting","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34226"},"slug":"accounting","categoryId":34226},{"name":"Calculation & Analysis","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34229"},"slug":"calculation-analysis","categoryId":34229}],"title":"How to Figure Out the Present Value of a Bond","strippedTitle":"how to figure out the present value of a bond","slug":"how-to-figure-out-the-present-value-of-a-bond","canonicalUrl":"","seo":{"metaDescription":"In many ways, the present value process is the same as the concepts used for notes payable. Assume a company issues a $100,000 bond due in four years paying sev","noIndex":0,"noFollow":0},"content":"<p>In many ways, the present value process is the same as the concepts used for notes payable. Assume a company issues a $100,000 bond due in four years paying seven percent interest annually at year-end. Here are the steps to compute the present value of the bond:</p>\n<ol class=\"level-one\">\n <li><p class=\"first-para\">Compute annual interest expense.</p>\n<p class=\"child-para\">The interest expense is $100,000 x 0.07 = $7,000 interest expense per year.</p>\n </li>\n <li><p class=\"first-para\">Find the market interest rate for similar bonds.</p>\n<p class=\"child-para\">You can check a financial publication, such as <i>The Wall Street Journal</i><i>,</i> for current market rates on bonds. The market interest rate may differ from the rate actually being paid. You want the market rate, because in the next step you use the market rate to look up the present value factor for the interest payments.</p>\n<p class=\"child-para\">Assume that the market rate for similar bonds is 11 percent. Specifically, similar bonds (with similar credit rating, stated interest rate, and maturity date) are priced to yield 11 percent. Because the stated rate is 7 percent, the bond must be priced at a discount. The discount is amortized into income, which increases the yield to maturity.</p>\n </li>\n <li><p class=\"first-para\">Find the present value factors for the face value of the bond and interest payments.</p>\n<p class=\"child-para\">Use the present value of $1 table to find the present value factor for the bond’s face amount. Use the present value of an annuity table to find the present value factor for the interest payments.</p>\n<p class=\"child-para\">In each case, find the factor for four periods (years) at 11 percent interest. In this example, the present value factor for the bond’s face amount is 0.65873, and the present value factor of the interest payments is 3.1025.</p>\n<p class=\"child-para\">Search the web to find a present value of $1 table and a present value of an annuity table. Look for tables that list the factors out to the fifth decimal place.</p>\n </li>\n <li><p class=\"first-para\">Use the present value factors to calculate the present value of each amount in dollars.</p>\n<p class=\"child-para\">The present value of the bond is $100,000 x 0.65873 = $65,873. The present value of the interest payments is $7,000 x 3.10245 = $21,717, with rounding.</p>\n </li>\n <li><p class=\"first-para\">Add the present value of the two cash flows to determine the total present value of the bond.</p>\n<p class=\"child-para\">In this example, $65,873 + $21,717 = $87,590.</p>\n </li>\n</ol>","description":"<p>In many ways, the present value process is the same as the concepts used for notes payable. Assume a company issues a $100,000 bond due in four years paying seven percent interest annually at year-end. Here are the steps to compute the present value of the bond:</p>\n<ol class=\"level-one\">\n <li><p class=\"first-para\">Compute annual interest expense.</p>\n<p class=\"child-para\">The interest expense is $100,000 x 0.07 = $7,000 interest expense per year.</p>\n </li>\n <li><p class=\"first-para\">Find the market interest rate for similar bonds.</p>\n<p class=\"child-para\">You can check a financial publication, such as <i>The Wall Street Journal</i><i>,</i> for current market rates on bonds. The market interest rate may differ from the rate actually being paid. You want the market rate, because in the next step you use the market rate to look up the present value factor for the interest payments.</p>\n<p class=\"child-para\">Assume that the market rate for similar bonds is 11 percent. Specifically, similar bonds (with similar credit rating, stated interest rate, and maturity date) are priced to yield 11 percent. Because the stated rate is 7 percent, the bond must be priced at a discount. The discount is amortized into income, which increases the yield to maturity.</p>\n </li>\n <li><p class=\"first-para\">Find the present value factors for the face value of the bond and interest payments.</p>\n<p class=\"child-para\">Use the present value of $1 table to find the present value factor for the bond’s face amount. Use the present value of an annuity table to find the present value factor for the interest payments.</p>\n<p class=\"child-para\">In each case, find the factor for four periods (years) at 11 percent interest. In this example, the present value factor for the bond’s face amount is 0.65873, and the present value factor of the interest payments is 3.1025.</p>\n<p class=\"child-para\">Search the web to find a present value of $1 table and a present value of an annuity table. Look for tables that list the factors out to the fifth decimal place.</p>\n </li>\n <li><p class=\"first-para\">Use the present value factors to calculate the present value of each amount in dollars.</p>\n<p class=\"child-para\">The present value of the bond is $100,000 x 0.65873 = $65,873. The present value of the interest payments is $7,000 x 3.10245 = $21,717, with rounding.</p>\n </li>\n <li><p class=\"first-para\">Add the present value of the two cash flows to determine the total present value of the bond.</p>\n<p class=\"child-para\">In this example, $65,873 + $21,717 = $87,590.</p>\n </li>\n</ol>","blurb":"","authors":[{"authorId":9050,"name":"Kenneth Boyd","slug":"kenneth-boyd","description":"Ken Boyd, a former CPA, has more than 37 years of experience in accounting, education, and financial services. He is the owner of Accounting Accidentally (<a href=\"https://www.accountingaccidentally.com/\" target=\"_blank\" rel=\"noopener\">www.accountingaccidentally.com</a>), which provides written and video content on accounting, personal finance, and entrepreneurship topics. His YouTube channel (<a href=\"https://www.youtube.com/user/kenboydstl\" target=\"_blank\" rel=\"noopener\">kenboydstl</a>) has hundreds of videos on accounting and finance.\r\n\r\nIn recent years, Boyd has served as an adjunct professor of accounting at the Cook School of Business at St. Louis University. He has written hundreds of articles for QuickBooks, Investopedia, and a number of other publications.","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/9050"}},{"authorId":8974,"name":"Lita Epstein","slug":"lita-epstein","description":" <b>Lita Epstein,</b> who earned her MBA from Emory University’s Goizueta Business School, enjoys helping people develop good financial, investing and tax-planning skills.<br /> While getting her MBA, Lita worked as a teaching assistant for the financial accounting department and ran the accounting lab. After completing her MBA, she managed finances for a small nonprofit organization and for the facilities management section of a large medical clinic.<br /> She designs and teaches online courses on topics such as investing for retirement, getting ready for tax time and finance and investing for women. She’s written over 20 books including <i>Reading Financial Reports For Dummies</i> and <i>Trading For Dummies.<br /> </i>Lita was the content director for a financial services Web site, MostChoice.com, and managed the Web site, Investing for Women. As a Congressional press secretary, Lita gained firsthand knowledge about how to work within and around the Federal bureaucracy, which gives her great insight into how government programs work. In the past, Lita has been a daily newspaper reporter, magazine editor, and fundraiser for the international activities of former President Jimmy Carter through The Carter Center.","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/8974"}},{"authorId":9468,"name":"Mark P. Holtzman","slug":"mark-p-holtzman","description":" <p><b>Mark P. Holtzman, PhD, CPA</b>, is Chair of the Department of Accounting and Taxation at Seton Hall University. He has taught accounting at the college level for 17 years and runs the Accountinator website at www.accountinator.com, which gives practical accounting advice to entrepreneurs.</p>","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/9468"}},{"authorId":9469,"name":"Frimette Kass-Shraibman","slug":"frimette-kass-shraibman","description":" <p><b>Frimette Kass-Shraibman</b> is Associate Professor of Accounting at Brooklyn College  CUNY. <b>Vijay S. Sampath</b> is Managing Director in the Forensic and Litigation Consulting business segment of FTI Consulting, Inc. ","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/9469"}},{"authorId":9470,"name":"Maire Loughran","slug":"maire-loughran","description":" <b>Maire Loughran</b> is a self-employed certified public accountant (CPA) who has prepared compilation, review, and audit reports for fifteen years. Additionally, she is a university professor of undergraduate- and graduate-level accounting classes.","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/9470"}},{"authorId":9471,"name":"Vijay S. Sampath","slug":"vijay-s-sampath","description":" <p><b>Frimette Kass-Shraibman</b> is Associate Professor of Accounting at Brooklyn College  CUNY. <b>Vijay S. Sampath</b> is Managing Director in the Forensic and Litigation Consulting business segment of FTI Consulting, Inc. ","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/9471"}},{"authorId":9472,"name":"John A. Tracy","slug":"john-a-tracy","description":" <b>John A. Tracy</b> is a former accountant and professor of accounting. He is also the author of Accounting For Dummies. ","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/9472"}},{"authorId":9473,"name":"Tage C. Tracy","slug":"tage-c-tracy","description":" <b>John A. Tracy</b> is a former accountant and professor of accounting. He is also the author of Accounting For Dummies. ","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/9473"}},{"authorId":9474,"name":"Jill Gilbert Welytok","slug":"jill-gilbert-welytok","description":" <b>Jill Gilbert Welytok, JD, CPA, LLM,</b> practices in the areas of corporate law, nonprofit law, and intellectual property. She is the founder of Absolute Technology Law Group, LLC (www.abtechlaw.com). She went to law school at DePaul University in Chicago, where she was on the Law Review, and picked up a Masters Degree in Computer Science from Marquette University in Wisconsin where she now lives. Ms. Welytok also has an LLM in Taxation from DePaul. She was formerly a tax consultant with the predecessor firm to Ernst & Young. She frequently speaks on nonprofit, corporate governance–taxation issues and will probably come to speak to your company or organization if you invite her. You may e-mail her with questions you have about Sarbanes-Oxley or anything else in this book at [email protected]. You can find updates to this book and ongoing information about SOX developments at the author’s website located at www.abtechlaw.com. <p><b>Daniel S. Welytok, JD, LLM,</b> is a partner in the business practice group of Whyte Hirschboeck Dudek S.C., where he concentrates in the areas of taxation and business law. Dan advises clients on strategic planning, federal and state tax issues, transactional matters, and employee benefits. He represents clients before the IRS and state taxing authorities concerning audits, tax controversies, and offers in compromise. He has served in various leadership roles in the American Bar Association and as Great Lakes Area liaison with the IRS. He can be reached at [email protected].</p>","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/9474"}}],"primaryCategoryTaxonomy":{"categoryId":34229,"title":"Calculation & Analysis","slug":"calculation-analysis","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34229"}},"secondaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"tertiaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"trendingArticles":[{"articleId":172026,"title":"Repurposing Items for Beautiful Holiday Decorating","slug":"decorating-for-the-holidays-with-what-you-already-have","categoryList":["home-auto-hobbies","crafts","gifts-holidays"],"_links":{"self":"/articles/172026"}},{"articleId":192609,"title":"How to Pray the Rosary: A Comprehensive Guide","slug":"how-to-pray-the-rosary","categoryList":["body-mind-spirit","religion-spirituality","christianity","catholicism"],"_links":{"self":"/articles/192609"}},{"articleId":193770,"title":"How to Play Rummy: All You Need to Know","slug":"rummy-understanding-the-rules-and-starting-a-game","categoryList":["home-auto-hobbies","games","card-games","general-card-games"],"_links":{"self":"/articles/193770"}},{"articleId":153792,"title":"Format Numbers in Thousands and Millions in Excel Reports","slug":"format-numbers-in-thousands-and-millions-in-excel-reports","categoryList":["technology","software","microsoft-products","excel"],"_links":{"self":"/articles/153792"}},{"articleId":147241,"title":"How to Use the Z-Table","slug":"how-to-use-the-z-table","categoryList":["academics-the-arts","math","statistics"],"_links":{"self":"/articles/147241"}}],"inThisArticle":[],"relatedArticles":{"fromBook":[],"fromCategory":[{"articleId":254831,"title":"Important Terms in Game Theory","slug":"important-terms-game-theory","categoryList":["business-careers-money","business","accounting","calculation-analysis"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/254831"}},{"articleId":254827,"title":"How to Create a Matrix from a Transition Diagram","slug":"create-matrix-transition-diagram","categoryList":["business-careers-money","business","accounting","calculation-analysis"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/254827"}},{"articleId":254821,"title":"How to Use Transition Matrices","slug":"use-transition-matrices","categoryList":["business-careers-money","business","accounting","calculation-analysis"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/254821"}},{"articleId":254814,"title":"How to Analyze Arguments with Euler Diagrams","slug":"analyze-arguments-euler-diagrams","categoryList":["business-careers-money","business","accounting","calculation-analysis"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/254814"}},{"articleId":254811,"title":"How to Analyze Compound Statements","slug":"analyze-compound-statements","categoryList":["business-careers-money","business","accounting","calculation-analysis"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/254811"}}]},"hasRelatedBookFromSearch":true,"relatedBook":{"bookId":282117,"slug":"corporate-finance-for-dummies","isbn":"9781119850311","categoryList":["business-careers-money","business","accounting","general-accounting"],"amazon":{"default":"https://www.amazon.com/gp/product/1119850312/ref=as_li_tl?ie=UTF8&tag=wiley01-20","ca":"https://www.amazon.ca/gp/product/1119850312/ref=as_li_tl?ie=UTF8&tag=wiley01-20","indigo_ca":"http://www.tkqlhce.com/click-9208661-13710633?url=https://www.chapters.indigo.ca/en-ca/books/product/1119850312-item.html&cjsku=978111945484","gb":"https://www.amazon.co.uk/gp/product/1119850312/ref=as_li_tl?ie=UTF8&tag=wiley01-20","de":"https://www.amazon.de/gp/product/1119850312/ref=as_li_tl?ie=UTF8&tag=wiley01-20"},"image":{"src":"https://www.dummies.com/covers/9781119850311.jpg","width":250,"height":350},"title":"Corporate Finance For Dummies","testBankPinActivationLink":"","bookOutOfPrint":true,"authorsInfo":"\n <p><p><b>Kenneth W. Boyd</b> has 30 years of experience in accounting and financial services. He is a four-time Dummies book author, a blogger, and a video host on accounting and finance topics.</p>","authors":[{"authorId":9764,"name":"Michael Taillard","slug":"michael-taillard","description":" <p><b>Kenneth W. Boyd</b> has 30 years of experience in accounting and financial services. He is a four-time Dummies book author, a blogger, and a video host on accounting and finance topics. 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How to Figure Out the Present Value of a Bond

By: Kenneth Boyd and Lita Epstein and Mark P. Holtzman and Frimette Kass-Shraibman and Maire Loughran and Vijay S. Sampath and John A. Tracy and Tage C. Tracy and Jill Gilbert Welytok and

Updated: 03-26-2016

Corporate Finance For Dummies

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In many ways, the present value process is the same as the concepts used for notes payable. Assume a company issues a $100,000 bond due in four years paying seven percent interest annually at year-end. Here are the steps to compute the present value of the bond:

Compute annual interest expense.

The interest expense is $100,000 x 0.07 = $7,000 interest expense per year.
Find the market interest rate for similar bonds.

You can check a financial publication, such as The Wall Street Journal, for current market rates on bonds. The market interest rate may differ from the rate actually being paid. You want the market rate, because in the next step you use the market rate to look up the present value factor for the interest payments.

Assume that the market rate for similar bonds is 11 percent. Specifically, similar bonds (with similar credit rating, stated interest rate, and maturity date) are priced to yield 11 percent. Because the stated rate is 7 percent, the bond must be priced at a discount. The discount is amortized into income, which increases the yield to maturity.
Find the present value factors for the face value of the bond and interest payments.

Use the present value of $1 table to find the present value factor for the bond’s face amount. Use the present value of an annuity table to find the present value factor for the interest payments.

In each case, find the factor for four periods (years) at 11 percent interest. In this example, the present value factor for the bond’s face amount is 0.65873, and the present value factor of the interest payments is 3.1025.

Search the web to find a present value of $1 table and a present value of an annuity table. Look for tables that list the factors out to the fifth decimal place.
Use the present value factors to calculate the present value of each amount in dollars.

The present value of the bond is $100,000 x 0.65873 = $65,873. The present value of the interest payments is $7,000 x 3.10245 = $21,717, with rounding.
Add the present value of the two cash flows to determine the total present value of the bond.

In this example, $65,873 + $21,717 = $87,590.

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