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Chapter 13 Additional Examples and Topics 341
Common Arguments Used in Financial Functions
Many arguments are common among related nancial functions. This section provides
information regarding these arguments. Date arguments (issue, maturity, and settle)
are not included. Arguments that are used by only a single nancial function are also
not included.
annual-rate
Bonds and other xed-rate, interest-bearing debt securities have a stated coupon or annual interest
rate used to determine periodic interest payments. annual-rate is used to represent the annual
interest rate, whether it is called a coupon rate or an annual interest rate.
coupon-rate is specied as a decimal number representing the annual coupon rate. In some
functions, coupon-rate can be 0 (if the security does not pay periodic interest), but coupon-rate
cannot be negative.
Assume that you own a security with a face value of $1,000,000 and that pays annual interest of 4.5%
based on the face value. coupon-rate would be 0.045. frequency of payment does not matter.
annual-yield
Bonds and other interest-bearing and discount debt securities have a yield that is calculated using
the coupon interest rate and the current price of the bond.
annual-yield is specied as a decimal number representing the security’s annual yield, which is
commonly stated as a percentage. annual-yield must be greater than 0.
Assume that you are considering the purchase of a particular bond. As the price of a bond goes
down, its yield goes up. Conversely, if the price of the bond rises, its yield decreases. Your broker
checks the pricing screens and tells you that the bond you are considering has a coupon rate of
3.25% and an annual yield of 4.5%, based on its current price (the bond is trading at a discount).
annual-yield would be 0.045.
cash-ow
Annuities, loans, and investments have cash ows. One cash ow is the initial amount paid or
received, if any. Other cash ows are other receipts or payments at a specic point in time.
cash-ow is specied as a number, usually formatted as currency. Amounts received are specied as
positive numbers and amounts paid are specied as negative numbers.
Assume that there is a townhouse that you plan to purchase, rent out for a period of time, and then
resell. The initial cash purchase payment (which might consist of a down payment and closing costs),
loan payments, repairs and maintenance, advertising, and similar costs, would be payments (negative
cash ows). Rents received from tenants, tax benets received through a reduction of other taxes,
and the amount received upon sale would be receipts (positive cash ows).
cost
The initial cost of the asset to be depreciated is generally the purchase price, including taxes, delivery,
and setup. Certain tax benets may be deducted from the cost.
cost is specied as number, usually formatted as currency. cost must be greater than 0.
Assume that you purchase a new digital photocopy machine for your oce. The purchase price of
the photocopy machine was $2,625 with tax. The vendor charged $100 to deliver and set it up. The
photocopy machine is expected to be used for 4 years, at which time it is expected to have a resale
value of $400. cost would be $2,725.