To determine whether a bond will be sold at a premium, at a discount, or at face
Question:
To determine whether a bond will be sold at a premium, at a discount, or at face value, one must know which of the following pairs of information?
a. Face value and the coupon rate on the date the bond is issued.
b. Face value and the market rate of interest on the date the bond is issued.
c. The coupon rate and the market rate of interest on the date the bond is issued.
d. The coupon rate and the stated rate on the date the bond is issued.
Step by Step Answer:
c The coupon rat...View the full answer
Financial Accounting
ISBN: 9781264229734
11th Edition
Authors: Robert Libby, Patricia Libby, Frank Hodge
Related Video
Bond valuation is the process of determining the worth of a bond. It is based on the present value of the bond\'s future cash flows, which include coupon payments and the return of the bond\'s face value (or \"principal\") at maturity. The discount rate used in the calculation is directly tied to prevailing interest rates, and a rise in interest rates will decrease the present value of the bond and thus lower its price. Conversely, a fall in interest rates will increase the present value of the bond and raise its price. Interest rates serve as a benchmark for determining the value of a bond, as they determine the discount rate used in the bond valuation calculation. The most commonly used measure of interest rates is the yield to maturity (YTM), which represents the internal rate of return of an investment in a bond if the investor holds the bond until maturity and receives all scheduled payments. Yield to maturity is a function of the coupon rate, the current market price of the bond, the face value of the bond, and the number of years remaining until maturity. By comparing the yield to maturity of a bond to prevailing market interest rates, an investor can assess the relative value of the bond.
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