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

question 6

Multiple Choice

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?

• A) The inflation rate
• B) The market rate of interest at the issue date for like instruments with similar risk.
• C) Bank rate
• D) None of these

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Definitions:

Economic Value Added

A measure of a company's financial performance based on the residual wealth calculated by deducting the cost of capital from its operating profit.

Residual Income

The amount of net income generated in excess of the minimum rate of return expected by shareholders or creditors, often used as a performance measure for investment or business valuation.

Stern & Stewart

A global management consulting firm known for its development of the Economic Value Added (EVA) concept.

Common Size Balance Sheets

Balance sheets expressed as percentages, allowing for easier comparison across companies or periods by standardizing financial statements.