Tables of Bond Values—Theory and Use
The Annals of the American Academy of Political and Social Science
This article assumes that the material presented is to be referred to by the average practical dealer or investor in bonds, who seeks results for easy use and application. There are more exhaustive treatments of the subject' which may better serve the purpose of those engaged in the valuation of an estate, or in other instances where great care should be exercised in order that all parties may be treated equably. It is strange how frequently one who has, during his entire business career, been
... iness career, been familiar with the handling of investment securities, or, in fact, been in almost daily contact with such matters, fails to comprehend the principles upon which bond values tables are computed. The writer has been time and again surprised to find that men who should understand such matters suppose that it is a mere calculation by simple arithmetic, and that not to obtain the results given in the ordinary tables of bond values by their method astonishes them. Such people have begun on the supposition, to illustrate, that they could take a bond bearing 6 per cent interest, maturing in ten years, costing 110, and divide the premimn-io per cent-by the length of time which the bond has to run-in the case cited, ten years-and, obtaining i as the result, deduct it from 6 per cent, the rate which the bond bears, and assume, therefore, that the net return upon that particular investment is 5 per cent, the 10 per cent premium being charged off at the rate of I per cent yearly. The failure in this reasoning arises from their not understanding the fundamental principles upon which such tables are based, which presuppose that the holder of a bond will, at the maturity of each one of the coupons, reinvest a sufficient portion of the money received, and keep it so invested until the maturity of the bond, so that the face value of the bond, added to the accumulation of reinvested interest, will, at its maturity, be exactly equivalent to the original cost of the same.