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How to Calculate PV of a Different Bond Type With Excel

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To determine the value of a bond today—for a fixed principal (par value) to be repaid in the future—we can use an Excel spreadsheet.

How to Calculate PV of a Different Bond Type With Excel

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A bond is a type of loan contract between an issuer (the seller of the bond) and a holder (the purchaser of a bond). The issuer is essentially borrowing or incurring a debt that is to be repaid at "par value" entirely at maturity (i.e., when the contract ends). In the meantime, the holder of this debt receives interest payments (coupons) based on cash flow determined by an annuity formula. From the issuer's point of view, these cash payments are part of the cost of borrowing, while from the holder's point of view, it's a benefit that comes with purchasing a bond. 

The present value (PV) of a bond represents the sum of all the future cash flow from that contract until it matures with full repayment of the par value. To determine this—in other words, the value of a bond today—for a fixed principal (par value) to be repaid in the future at any predetermined time—we can use a Microsoft Excel spreadsheet.

 Bond Value = ∑ p = 1 n PVI n + PVP where: n = Number of future interest payments PVI n = Present value of future interest payments PVP = Par value of principal \begin{aligned} &\text{Bond Value} = \sum_{ p = 1 } ^ {n} \text{PVI}_n + \text{PVP} \\ &\textbf{where:} \\ &n = \text{Number of future interest payments} \\ &\text{PVI}_n = \text{Present value of future interest payments} \\ &\text{PVP} = \text{Par value of principal} \\ \end{aligned} ​Bond Value=p=1∑n​PVIn​+PVPwhere:n=Number of future interest paymentsPVIn​=Present value of future interest paymentsPVP=Par value of principal​

 We will discuss the calculation of the present value of a bond for the following:

 B) Bonds with annual annuities

 C) Bonds with bi-annual annuities

 D) Bonds with continuous compounding

Updated: 4 weeks ago

URL: https://www.investopedia.com/articles/investing/051315/present-value-different-bond-types-using-excel.asp

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