Multiple Choice
Which of the following best defines a bond's current yield?
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11. Long Term Liabilities
Introduction to Bonds and Bond Characteristics
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Join thousands of students who trust us to help them ace their exams!Watch the first videoMultiple Choice
Which of the following are required to calculate the current value of a bond?
A
Market price, book value, and par value
B
Face value, dividend yield, and number of shares outstanding
C
Coupon rate, stock price, and earnings per share
D
Face value, coupon rate, market interest rate, and time to maturity
Verified step by step guidance1
Understand that the current value of a bond is determined by discounting its future cash flows (coupon payments and face value) to the present using the market interest rate.
Identify the key components required for the calculation: Face value (the amount the bondholder will receive at maturity), coupon rate (the annual interest rate paid by the bond), market interest rate (the rate used to discount future cash flows), and time to maturity (the remaining time until the bond matures).
Calculate the periodic coupon payment using the formula: , where is the face value and is the coupon rate.
Discount the coupon payments to the present value using the formula: , where is the market interest rate and is the number of periods.
Discount the face value to the present value using the formula: , and then sum the present value of the coupon payments and the present value of the face value to determine the bond's current value.
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