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Jack and Lance are discussing how the market price of a bond is determined. Jack believes that the market price of a bond is solely a function of the amount of the principal payment at the end of the term of a bond. Is he right?

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Final answer:

No, the market price of a bond is not solely determined by the amount of the principal payment. It is influenced by interest rates and the risk associated with the bond.

Step-by-step explanation:

No, Jack is not right. The market price of a bond is not solely determined by the amount of the principal payment at the end of the term of the bond. The market price of a bond is influenced by several factors, including the prevailing interest rates and the riskiness of the borrower. The price of a bond is actually determined by the present value of the future expected payments.

For example, if interest rates in the economy rise, an 8% bond will become less attractive compared to other bonds that might offer a higher interest rate. To make the 8% bond more appealing, the seller will need to lower its price below the face value of the bond.

Therefore, the market price of a bond is not solely based on the principal payment, but also takes into account the prevailing interest rates and the risk associated with the bond.

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