What is involved in computing the bond selling price?

• A. The sum of future principal payments only
• B. The sum of interest payments only
• C. The present value of principal and periodic interest payments
• D. The market value of the bond on the stock exchange

Answer: (C)

Computing the bond selling price involves determining the present value of future cash flows associated with the bond. This includes both the principal amount that will be repaid at maturity and the periodic interest payments made to bondholders.

To arrive at the selling price, each cash flow is discounted back to its present value using the market interest rate. The principal payment, which is typically paid at the end of the bond’s term, is calculated as the present value of a single sum. The periodic interest payments, also known as coupon payments, are considered an annuity and are calculated as the present value of an annuity. Adding these two present values together gives the total selling price of the bond.

This method accurately reflects the time value of money and provides a realistic value based on current market conditions and interest rates. Therefore, the correct answer encompasses both essential components—future principal and interest—to determine a bond's selling price.