The market price of a bond is equal to the present value of the:
A) face value minus the present value of the annuity payments.
B) annuity payments plus the future value of the face amount.
C) face value plus the present value of the annuity payments.
D) face value plus the future value of the annuity payments.
E) annuity payments minus the face value of the bond.

Question

Quizplus · Accepted Answer

The market price of a bond is equal to the present value of the face value plus the present value of the annuity payments. This is because the bond represents a stream of cash flows consisting of periodic interest payments (the annuity payments) and the return of the principal (the face value) at maturity. The market price of the bond reflects the time value of money, which means that future cash flows are worth less than current cash flows. By discounting the future cash flows at the appropriate discount rate, we can arrive at the present value of the bond.

The Market Price of a Bond Is Equal to the Present