The bond analysis method by which an analyst compares the intrinsic value to the current market price is
A) internal rate of return.
B) average rate of return.
C) net present value.
D) profitability index.

Question

Quizplus · Accepted Answer

The bond analysis method where an analyst compares the intrinsic value to the current market price is called net present value (NPV). NPV is calculated by subtracting the initial investment from the present value of the expected future cash flows. If the result is positive, the bond is undervalued and may be a good investment. If the result is negative, the bond may be overvalued and should be avoided. Internal rate of return (IRR) measures the profitability of an investment and is calculated as the discount rate that makes the NPV equal to zero. Average rate of return (ARR) measures the return on investment as a percentage of the initial investment over a set period of time. Profitability index (PI) measures the ratio of the present value of future expected cash flows to the initial investment. While these methods are useful in bond analysis, they are not specifically designed for comparing intrinsic value to current market price.

The Bond Analysis Method by Which an Analyst Compares the Intrinsic