Question

The selling price of a bond includes the present value of the face amount plus the present value of all periodic interest payments to be made. T/F

Answer 1

Bond being a debt security, the issuer of bond pays to bond holder periodic interest for borrowings as coupon amount and repay the face value on maturity date. The price of bond is equivalent to sum of present value of future interest payments and present value of face amount.

Formula of bond price is stated as:

Bond price = C x F x 1 – (1+r)^-t/r + F/ (1+r)^t

Where, C, F, r, t is the coupon rate, face value, interest rate, and time period respectively.

Bond price consists of two parts viz. PV of coupon payments and PV of face value.

PV of interest payment (as PV of annuity) = C x F x 1 – (1+r)^-t/r

PV of face value = F/ (1+r) ^t

Hence the statement is “TRUE”.