[confused_college_student]

The issue price of bonds is equal to
a. the present value of the principal
b. the present value of the interest
c. the present value of the principal minus the present value of the interest
d. the present value of the principal plus the present value of the interest


I think the answer is A, but I'm not sure. My book says the present value of the bond is the present value of an annuity plus the present value of a single amount. So I am wondering if it isn't maybe D?

Julie

[morgaine300]

Hi. D is actually correct. It would only be issued at the face value if the contract rate were equal to the market rate, and the question is not giving you that information to work with. Even if they are equal, D will still work to get the issue price.

As for the statement in the book, the "single amount" referred to is the bond face value. That's a single amount because it will be paid back once, as a lump sum, at the maturity date. The "annuity" is the series of interest payments. An annuity is actually any series of equal payments made at equal times. (The kind you hear about like for retirement is only one use of the word.) Since interest payments are made in equal amounts at equal times, that's an annuity.

So your book is essentially saying the same thing as D, but using a couple of different terms.