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I'm having trouble determining how to find the answer for this question. Any help would be appreciated. Thanks in advance!
"A bond with a par value of $1,000, a coupon rate of 5%, 3 years to maturity, and making annual payments, is worth how much if the current discount rate is 7%?"
The correct answer is $947.51. The answer key says to use the NPV equation.
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01-08-2015, 12:43 PM
(This post was last modified: 01-08-2015, 12:55 PM by Yanji.)
I forgot if you're allowed to use a financial calculator or not on this test, but this is a basic bond pricing question. The bond pricing formula is:
NPV = C * (1-(1+r)^-n)/r + P / (1+r)^n
Where C is the coupon payment, n is number of compounding periods, r is discount rate, and P is face value. The first part of the formula calculates the present value of the annuity stream, while the second part calculates the present value of the lump sum future payment. So,
NPV = 50 * (1-(1+0.07)^-3)/.07 + 1000 / (1+0.07)^3
This gives you 947.51. If using a financial calculator, you can plug these numbers into your calculator:
N = 3
i = 7
PMT = 50
FV = 1000
Then solve for PV. If you need to buy a financial calculator, I recommend either the HP-12C or TI BAII Plus, as those have pretty much become the two standard financial calculators. I much prefer the HP-12C but the learning curve is somewhat steeper than with the BAII Plus. Once you wrap your head around TVM (which takes some time, but is a very simple concept at its core), the Finance DSST becomes a total breeze.
CPA (WA), CFA Level III Candidate
Currently pursuing: ALM, Data Science - Harvard University, Cambridge, MA (12/48, on hold for CFA/life commitments)
MBA, Finance/Accounting - Indiana University, Bloomington, IN, 2015
BSBA, General Management - Thomas Edison State College, Trenton, NJ, 2012
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Thank you so much for your quick and thorough reply.
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Yanji Wrote:I forgot if you're allowed to use a financial calculator or not on this test, but this is a basic bond pricing question. The bond pricing formula is:
NPV = C * (1-(1+r)^-n)/r + P / (1+r)^n
Where C is the coupon payment, n is number of compounding periods, r is discount rate, and P is face value. The first part of the formula calculates the present value of the annuity stream, while the second part calculates the present value of the lump sum future payment. So,
NPV = 50 * (1-(1+0.07)^-3)/.07 + 1000 / (1+0.07)^3
This gives you 947.51. If using a financial calculator, you can plug these numbers into your calculator:
N = 3
i = 7
PMT = 50
FV = 1000
Then solve for PV. If you need to buy a financial calculator, I recommend either the HP-12C or TI BAII Plus, as those have pretty much become the two standard financial calculators. I much prefer the HP-12C but the learning curve is somewhat steeper than with the BAII Plus. Once you wrap your head around TVM (which takes some time, but is a very simple concept at its core), the Finance DSST becomes a total breeze.
When I took the exam, I was allowed to bring a finance calculator.
CLEPS Passed: 10 DSST Passed: 11 TECEPS: 1
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