In an efficient market the price of a bond

Question

Quizplus · Accepted Answer

In an efficient market, the price of a bond would equal the present value of future interest and principal payments. This is because market participants have access to all available information and therefore are able to accurately price the bond based on its expected cash flows. If the bond were priced higher or lower than its present value, market participants would buy or sell the bond until the price converged to its fair value. In an inefficient market, however, the price of a bond could be either higher or lower than its present value, which creates opportunities for investors to profit from mispricing.

In an Efficient Market the Price of a Bond