If the Market Rate of Interest Is 10%, a $10,000

question 177

Multiple Choice

If the market rate of interest is 10%, a $10,000, 12%, 10-year bond that pays interest semiannually would sell at an amount

• A) less than face value.
• B) equal to the face value.
• C) greater than face value.
• D) that cannot be determined.

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Definitions:

Discount Rate

The interest rate charged to commercial banks and other financial institutions for the loans they take from the central bank or the rate used in discounted cash flow analysis to determine the present value of future cash flows.

NPV

NPV (Net Present Value) is a financial metric that calculates the present value of expected future cash flows of an investment, subtracting the initial investment cost.

Initial Cash Outflow

The initial amount of money paid out or expended, typically for an investment or purchase, before any returns are considered.

Required Return

The minimum rate of return an investor expects to achieve by investing in a particular asset or project.