I think of the question conceptually in my head as:
What is the value, at the start, of a financial instrument that will pay you USD50,000 (USD1,000,000 * 5%) every year for 6 years then repay you USD1,000,000 at the end?
So the initial carrying value can be calculated with your BA II Plus using NPV.
With your BA II Plus, enter:
BA II Plus keystrokes
N = 6
6 year bond = 6 payment periods
I/Y = 3
3% market rate
PMT = 50,000
USD50,000 payment per year (5% of USD1M)
FV = 1,000,000
USD1,000,000 future value (at end of term)
Given all other parameters, compute PV
The calculator should show -1,108,343.83.
The result is negative because the cashflow is opposite to the payments you entered. In my example I set PMT and FV as positive (cashflow to me) so PV will be negative (cashflow from me to pay for the bond).
Which provider is this? They really should be providing an explanation with keystrokes.
Thanks for the help. There was another example question later on, which spelled it out. I’m using Bloomberg. It does tend to jump around a bit – throwing you straight into an advanced example and then later on going back to explain the basics. I assume it’s the AI gauging my knowledge, but it can be a bit confusing.