Determining the Market Value of Bonds

Determining the Market Value of Bonds - Determining the...

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Determining the Market Value of Bonds If you were an investor wanting to purchase a bond, how would you determine how much to pay? To be more specific, assume that Coronet, Inc. issues a zero-interest (pays no interest) bond with a face value of $1,000,000 due in 20 years. For this bond, the only cash you receive is $1 million at the end of 20 years. Would you pay $1 million for this bond? We hope not, because $1 million received 20 years from now is not the same as $1 million received today. The term time value of money is used to indicate the relationship between time and money––that a dollar received today is worth more than a dollar promised at some time in the future. If you had $1 million today, you would invest it and earn interest so that at the end of 20 years, your investment would be worth much more than $1 million. Thus, if someone is going to pay you $1 million 20 years from now, you would want to find its equivalent today, or its present value . In other words, you would want to determine the value today of the amount to be
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Determining the Market Value of Bonds - Determining the...

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