The selling price of a bond should be equal to the present value of the future cash flows the lender will receive,i.e. ,all the interest payments and the reimbursement of the principal.In this computation,which interest rate (also called discount)is used?

Question

Quizplus · Accepted Answer

The market rate of interest at the issue date for like instruments with similar risk should be used as the discount rate in the computation of the present value of future cash flows. This is because the market rate reflects the opportunity cost of investing in similar instruments with comparable risk. The inflation rate and bank rate may not be suitable as discount rates because they do not necessarily reflect the true cost of borrowing or investing in the market. None of these is also incorrect because a discount rate is required for the present value computation.

The Selling Price of a Bond Should Be Equal to the Present