Automating Partial Period Bond Valuation With Excels Day Counting Functions
An Excel model for calculating the actual price of bonds under a 30 day/month, 360 day/year day counting assumption by nesting the DAYS360 function within the PV function is developed. When programmed into an Excel spreadsheet, the model can accommodate annual and semiannual payment bonds sold on or between interest dates using six fundamental inputs, including the bond’s par value, maturity date, annual stated rate of interest, and payment frequency, the annual market rate of interest, and the settlement date. Thus, the model can be applied across the business curriculum in a variety of introductory and more advanced level courses.
Accounting for Bonds With Accrued Interest in Conformity With Brokers' Valuation Formulas
This article explains how to apply brokers' valuation methods to accounting for bonds when interest payments do not coincide with settlement or balance sheet dates. We show how to calculate a bond's present value on these dates using a simple approach that conforms with the method used by brokerage institutions to compute the bond's “actual price.” We then clarify how a broker subtracts accrued interest from this actual price to arrive at the quoted price, and how this quoted price relates to the bond's carrying amount and “fair value” (per SFAS Nos. 107, 115 and 124). We also precisely compute the change in a bond's carrying amount over fractional periods after settlement and around balance sheet dates. Finally, we demonstrate how to integrate these refinements into intermediate textbook illustrations. Throughout, we provide instructions for computing bond valuations using spreadsheet application functions.
An intuitive appeal for the correct calculation of Present Value-Based Measurements in Accounting
Abstract Most introductory and intermediate textbooks in accounting provide a discussion of the time value of money and include a presentation of the calculation of bond values as an example. The bond valuation model is needed primarily for the valuation of debt on the firm's balance sheet when the issue is placed in the market at an amount other than its face value. Often, however, these texts present this information in an incorrect or confusing manner. The errors arise from improperly determining the appropriate discount rate to use when interest payments are other than annual. This paper briefly summarizes prior efforts to correct this problem and offers a consolidated and intuitive approach for accounting instructors to use in presenting this information to students. Examples are provided which can be used in the classroom to explain differences in the alternative techniques, as well as explain the types of errors caused by use of incorrect procedures under different assumptions. Present value concepts play an important role in the recognition and measurement of many accounting transactions, including those in such areas as corporate bonds, long-term notes, long-term investments, capital leases, pension cost components, and capital budgeting. The importance of present value issues is also evident from a Discussion Memorandum entitled “Present Value-Based Measurements in Accounting,” issued by the Financial Accounting Standards Board (FASB, 1990). Given the importance that time-value-of-money concepts play in accounting, and the scope of the current FASB agenda project dealing with present-value measurements, it is important for the accounting instructor to correctly understand and present this information.