What are the basic mathematical concepts one should know for calculations involved in bond prices and yields?
The time value of money functions related to calculation of Present Value (PV), Future Value (FV), etc. are important mathematical concepts related to bond market. An outline of the same with illustrations is provided in Box II below. Box II Time Value of Money Money has time value as a Rupee today is more valuable and useful than a Rupee a year later. The concept of time value of money is based on the premise that an investor prefers to receive a payment of a fi xed amount of money today, rather than an equal amount in the future, all else being equal. In particular, if one receives the payment today, one can then earn interest on the money until that specifi ed future date. Further, in an infl ationary environment, a Rupee today will have greater purchasing power than after a year. Present value of a future sum The present value formula is the core formula for the time value of money.
