Question

22. The price at which a bond sells is equal to the: A) Sum of the future interest payments, plus the maturity value of the bonds. B) Maturity value of the bonds plus the present value to investors of the future interest payments. C) Sum of the future interest payments, minus the maturity value of the bonds. D) Present value to investors of the future principal and interest payments.

Answer 1

Answer:

B) Maturity value of the bonds plus the present value to investors of the future interest payments.

Explanation:

Bond price is the present discounted value of the future cash stream generated by a bond. It refers to the sum of the present values of all likely coupon payments plus the present value of the par value at maturity. To calculate the bond price, one has to simply discount the known future cash flows.

If a bond's coupon rate is more than its YTM, then the bond is selling at a premium. If a bond's coupon rate is equal to its YTM, then the bond is selling at par. Formula for yield to maturity: Yield to maturity(YTM) = [(Face value/Bond price)1/Time period ]-1.