Multiple Choice
Which one of the following will occur when the internal rate of return (IRR) equals the required return for an investment in securities?
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7. Receivables and Investments
Introduction to Investments in Securities
Multiple Choice
When pricing a bond, how many cash flows must be discounted to present value?
A
Only the first coupon payment
B
All future coupon payments and the face value at maturity
C
Only the last coupon payment and the face value
D
Only the face value at maturity
Verified step by step guidance1
Understand the concept of bond pricing: A bond's price is determined by the present value of all future cash flows associated with the bond, which includes periodic coupon payments and the face value (principal) at maturity.
Identify the cash flows involved: For a bond, the cash flows typically consist of regular coupon payments (interest payments) and the repayment of the face value (principal) at maturity.
Apply the present value formula: Each cash flow must be discounted to its present value using the formula \( PV = \frac{CF}{(1 + r)^t} \), where \( CF \) is the cash flow, \( r \) is the discount rate, and \( t \) is the time period.
Discount all future coupon payments: Calculate the present value of each coupon payment by applying the formula for each time period until maturity.
Discount the face value at maturity: Calculate the present value of the face value (principal) by applying the formula for the time period corresponding to the bond's maturity.
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