I'm working through the following example with an HP-12c, but can't get the right answer, and it's frustrating the **** out of me. Where am I going wrong? It's from Bond Markets, Analysis, and Strategies, 9th Ed. by Fabozzi on Pg. 35. BTW it's not a homework question; it's a book example. In sum, they get an answer of $931.69; I get $1000.00. Grrrr..... I'm entering the figures into an HP-12c like so fCLX 3 -> n (Three coupon payments total) 10 -> i (Assumed 10% interest rate) PMT -> 100 (Coupon payment value) FV -> 1000 (Future value; face/par value of bond) PV (Present value gives -$1000!?) CHS Were am I going wrong? Details follow... "Suppose that a financial instrument selling for $903.10 promises to make the following annual payments: Code: Years from Now Promised Annual Payments (Cash Flow to Investor) 1 $ 100 2 $ 100 3 $ 100 4 $ 1,000 "To compute yield, different interest rates must be tried until the present value of the cash flows is equal to $903.10 (the price of the financial instrument). Trying an annual interest rate of 10% gives us the following present value: Code: Years from Now Promised Annual Payments Present Value of Cash Flow @10% 1 $ 100 $ 90.91 2 $ 100 $ 82.64 3 $ 100 $ 75.13 4 $ 1,000 $ 683.01 --------- $ 931.69
I did it back of the evenlope and got like 15.88% but I would not risk my life for that number!! Have not done this in 15 years...
HP-12c? Isn't that Reverse Polish input or something?!? I like it...... At any rate, a trap I always recall: is the sale (the pricing) at the beginning of the 4th period, or the end? It doesn't jump out at me in the question...
Your HP12 is assuming a 100 coupon on the fourth year : so the final payment is 1100 vs 1000 in the example. The extra 100 in your HP calc has a PV of about 68.3