Question

How are tome value money concepts used in accounting for valuing bonds that are held as investments or issued by your company?

Answer 1

Time value of money states that money received in future is less in value that means if you have $100 today, after 5 years the worth of $100 will not be same, due to inflation it will lose value.

So if you are expecting a payment in future after n years and interest rate or discounting rate is 10%, you can calculate PV by using below formula

PV = FV/(1 + interest rate)^n

Now coming to your question, if you purchase a bond you receive annual coupon and maturity amount at the time of the maturity of the bond.

It is very important to know the current value of the bond that you should pay to acquire the bond.

If your required return is 10%, you need to discount all the cash inflows from the bond to know the current value of the bond.

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Hope that helps.

Feel free to comment if you need further assistance J