A $1,000 Face Value Bond with a $100 Annual Interest

question 67

True/False

A $1,000 face value bond with a $100 annual interest payment with five years to maturity (not expected to default)would sell for a premium if interest rates were below 9% and would sell for a discount if interest rates were greater than 11%.

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Definitions:

Capital Investment Analysis

Involves evaluating the potential profitability and risks of investments made in long-term assets to determine their feasibility and impact on a company’s future.

Average Rate of Return

It calculates the return, generated over a period of time, of an investment compared to the initial investment.

Net Present Value Method

A method in capital budgeting that evaluates an investment by calculating the difference between the present value of cash inflows and the present value of cash outflows over a period of time.

Present Value

The estimated current value of a forthcoming sum of money or series of cash inflows, considering a certain rate of return.