Tutor profile: Mayur K.
Calculate the value of a $ 1000, 30 year treasury bond with a coupon of $80 per year, issued in 1995, that has 10 years to maturity if the current market rate is 4 percent. A) Calculate the present value. B) calculate the future value.
Present Value (PV) = Current value of the bond if issued to the another person = $ 1,000 Future Value (FV) = Present Value + Interest Earned during the period of holding In this case, the calculation of future value will be as follows – FV = PV + (1+r)n Here, FV = Future Value (To be calculated) PV = Present Value ($1,000) r = Rate of interest (4%) n = Period of Holding (Difference between issue and redemption/maturity date) (10 years) So, by putting the values in above formula, we get FV = $1,480.24
1 Define (in theory). How do you calculate the value of a bond? Explain formula’s logic.
Lets go to the basic first. Bond means a security representing the debt of the company or government issuing it. The value of bond is equal to the present value of its expected (future) cash flows. So the bond is nothing, but what you expect to earn from that bond and what is the today’s value of that expected earnings. The earnings can be in any form such as, interest, discount, extra money paid by the borrower to you at the time of maturity (it is called premium) or capital appreciation on account of demand and supply function. So if we go by this valuation principal, the valuation process involves the following three steps – 1. Estimate the expected cash flows. 2. Determine the appropriate interest rate or interest rates that should be used to discount the cash flows. 3. Calculate the present value of the expected cash flows found in step one by using the interest rate or interest rates determined in step two.
Reference the appropriate authoritative standards and describe how auditors should evaluate the reasonableness of estimates.
Applicable Auditing Standard - AS 2501: Auditing Accounting Estimates https://pcaobus.org/Standards/Auditing/Pages/AS2501.aspx The Auditing Standard 2501 provides guidance on the auditing of accounting estimates. The auditor is responsible for evaluating the reasonableness of accounting estimates made by management in the context of the financial statements taken as a whole. As estimates are based on subjective as well as objective factors, it may be difficult for management to establish controls over them. Even when management's estimation process involves competent personnel using relevant and reliable data, there is potential for bias in the subjective factors. Accordingly while planning and performing procedures to evaluate accounting estimates, the auditor should consider with an attitude of professional skepticism both the subjective and objective factors.
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