An example of bond pricing using the 5-key approach.

Text Comments (50)
## Would you like to comment?

Isaac Batterham (10 days ago)

Nothing else like this in the net in 2019. Thanks. Could you make one on discount securities calculations on the hp financial calculator please

PJ Swords (6 months ago)

ok, but need to see the formula on paper

Jasmin Ramli (1 year ago)

hello, is par value always constant eventhough in other exercise?

Jasmin Ramli (1 year ago)

thank you for the information sir. its really helping me

Kevin Bracker (1 year ago)

Technically, par value can be values other than $1000. However, the VAST majority of time it is $1000 and I always tell my class to assume this unless it states otherwise for simplicity. One example of a bond that has variable par value would be Treasury Inflation Protected Securities in which the par value is adjusted every 6 months based on the Consumer Price Index.

Destiny Ziarkowski (1 year ago)

I know it's been years since you've posted this! But this really helps! Thank you!

Maggiee (1 year ago)

i really appreciate you. even its 2017 april now, i got so much help by ur videos. thx for being my secret finance professor. ;)

Danielle Pritchett (1 year ago)

Why wouldn't you divide the 7.1% by 2 if we are calculating periods and payments as semiannual as well? That is the annual rate, not semiannual rate.... Thank you!

Kevin Bracker (1 year ago)

By setting the calculator to 2 P/Y, it recognizes that the I/Y is the annual rate and adjusts for you.

NoneOfYour business (2 years ago)

Where did that $55 came from? Why wasn't that stated in the question? or how would I know.. please help
thank u in advance!!

NoneOfYour business (2 years ago)

thanks a lot :) now i understand

Kevin Bracker (2 years ago)

5.5% coupon implies 5.5% of the par value (which is typically $1000 unless otherwise stated). So, 5.5% of $1000 = $55 per year. Since most bonds pay semi-annual coupon, that translates to $27.50 every 6 months in coupon payments.

Desert Cactus (2 years ago)

thank you! I was stuck on this for hours.

Garrett Sullivan (2 years ago)

Your videos have been a great help. Could you cover a make whole call provision call price in a video?

Drey0806 (3 years ago)

Why do you assume the bonds pay interest semi annually? Should this always be the assumption?

usman khan (2 years ago)

Kevin Bracker good

Kevin Bracker (3 years ago)

+DRey0083 This is always the case in my classes. In practice it is true the vast majority of the time, but most textbooks cover both annual and semi-annual, so depending on the class you are in you may encounter annual coupon payments.

Marcell B. (4 years ago)

If you set your calculator to "2" periods per year, why are you still making n=20 if the time frame is 10 years? Isn't the calculator supposed to divide n into double the periods when you tell it 2 periods per period.

Marcell B. (4 years ago)

Thanks

Kevin Bracker (4 years ago)

When you are dealing with non-annual periods (true for any TVM problem, not just bonds), you should (a) change the periods per year in your calculator and (b) recognize that N is the number of periods (not years). So 10 years of semi-annual = 2 P/Y and 20 N. 30 years of monthly (for example a mortgage) is 12 P/Y and 360 N

Kejian Leng (4 years ago)

Thank you so much, very clear!

Hafeezah Van der Ross (4 years ago)

2014 and you saved my life

kyle jackson (5 years ago)

Very Good Video, Thanks

Kevin Bracker (5 years ago)

Thanks and I'm glad you found the videos helpful. I teach at Pittsburg State University in Pittsburg, KS.

Rakan Smadi (5 years ago)

Never mind;) was working with 7.1 as interest ;)

Rakan Smadi (5 years ago)

Hello Kevin, shouldn't you calculate the cash flow by dividing he interest on 2 then multiply by 1000? So your cash flow ends up 35.5 instead of 27.5.

ODSTimberwolf (5 years ago)

Thank you for you knowledge. You saved me in my business finance class.

Charito Figaro (5 years ago)

Cool

frisbeeeater (5 years ago)

Thank you so much! Never realized how easy it was to just let the calculator do it.

Amy Lingyi Sun (6 years ago)

Thanks so much Kevin, this really helps me a lot!

Venice Yamomo (6 years ago)

lucky for those who have financial calculators. I'll stick with my sci'cal for now. >.<

g97erry (6 years ago)

Thanks very much for posting!!!

Rj D'Souza (6 years ago)

this is a great teaching tool... i commend you

kerumble (6 years ago)

Thank you! These are really great vids, really helpful.

Kevin Bracker (6 years ago)

No, it doesn't always have to be 2 Periods per Year. However, most bonds pay semi-annual coupon payments and I find it simpler to focus on just staying at 2 P/Y for my class and focusing on the basics of the valuation so when I teach bonds in the introductory class, I just have them always assume 2 P/Y. Some books/profs will switch back and forth.

kerumble (6 years ago)

Do you always have to use 6 month cash flows for a Bond PV calculation? All the other examples I've seen so far use annual cash flows for PV. Obviously the answers are (slightly) different, so now I'm confused which one to use.

SuperRoycethe59 (6 years ago)

ahhh, gotcha. thank you

Kevin Bracker (6 years ago)

Setting the calculator to 2 Periods per year took care of that. An alternative approach (as you suggest) would be to divide the required return by 2 and keep the periods per year at 1.

SuperRoycethe59 (6 years ago)

why didn't you divide the 7.1% by 2. wouldn't that adjust it for the semi-annual payments? you adjusted everything else..

xsy (6 years ago)

@kevinbracker ok no problem thank you !!

Kevin Bracker (6 years ago)

@vimalachandran01 It requires you using the TVM tables provided in many textbooks or the actual formulas for PV and PV of an Annuity. I don't teach using these methods in my classes so they are not included in the videos.

xsy (6 years ago)

how to calculate without calculator ?

Kevin Bracker (7 years ago)

@gracemundat Good luck on your exam!

Isabelle Grace (7 years ago)

im having cf exam tmro, i been studying using ur material as well as concept from investopedia. ur great kelvin, thank u a lot for your help. wish u success!

tachyonzero (7 years ago)

@joewright213
You have to set the P/Y to 2, P/Y=2 then do 5 steps. the answer will be $886.81

Isuru Senevirathne (1 year ago)

$888

Joe Wright (7 years ago)

when i try to replicate this on my TI-84 tvm solver, i get -542.72
what did i do wrong?!...could you give me the inputs for tvm_solver?...please?

Kevin Bracker (7 years ago)

@satchi123 FV would be 1000 (the par value of the bond). Assuming you are using a financial calculator, 55 (I'm assuming 5.5% coupon payment and annual coupons) would be your PMT. If you add all the coupons up and put them in with the par value as the FV, you are not properly accounting for Time Value of Money.

Valon Hyseni (7 years ago)

Thanks alot, I dont want to sound bad, but 10 mins here worthed more than 3hrs the class in my university..

Imran (9 years ago)

This is very clear and well explained just wish you told us what the formula was for those who do not have the fancy calculator

Join YouTube for a free account, or sign in if you are already a member.

Brokerage fee amount by transaction value 1.
Trade online and settle your trade to a CDIA or CommSec Margin Loan 2.
Trade online and settle into a bank account of your choice.
Share Trades over the Phone 3.
CommSec Share Packs online 4.
CommSec Share Packs over the phone 4.
Trades requiring settlement through a third party 6.
1 For GST rounding reasons, the final brokerage fee may vary from the stated or expected brokerage fee by a couple of cents.
4 Normal brokerage will apply when a stock acquired through CommSec Share Packs is subsequently sold.
5 Amount per share will be noted as brokerage on each confirmation issued. There will be no substitution should a stock have a trading halt placed on it.
6 Includes third party Margin Lending, and where the Commonwealth Bank exercises its rights under the loan Terms and Conditions.
Other fees.

© 2019 How to make money from blog writing

Other fees may apply. Please see the CommSec Financial Services Guide. Get started. Open a CommSec Share Trading Account. Buy and sell shares using a CommSec Share Trading Account with our cash account - with it you can seamlessly settle trades, transact and earn interest. Buy and sell shares using a CommSec Share Trading Account with your existing bank account. Frequently asked questions. Shares held with another broker. For the transfer to be successful the name and address registered on your issuer holdings must match your CommSec account. Your request will be completed within 72 hours. Shares held with the share registry To transfer shares held with the share registry into your CommSec Trading Account you need to complete an Issuer Sponsored Holdings to CHESS Sponsorship Transfer Form. Your request will be completed within approximately 48 to 72 hours of receipt. When you have bought and sold shares on the same day and the next trading day, your payment may be partially or wholly offset. For more information refer to the New Client Guide.