Final answer:
The present value of a single sum is less than its future value. The current market value of a long-term bond is calculated by discounting both the interest payments and the principal amount to their present values, not the future values. Real-world bond valuation considers market interest rates and credit risk, emphasizing the importance of the present value concept in such financial calculations.
Step-by-step explanation:
The present value of a single sum is always less than the future value of the same single sum. When it comes to bonds, the current market value of a long-term bond takes into account two types of cash flows: the interest payments during the life of the bond and the principal amount paid upon maturity. To determine the bond's market value, one would calculate the present value of both these cash flows. The correct calculation would be: the present value of the interest amount (as an annuity) and the present value of the principal amount (as a single sum).
In real-world situations, these calculations can be complex as they need to consider the market's interest rates and the credit risk associated with the borrower. Nevertheless, the essence of pricing a bond lies in determining the present value of the expected future payments, which includes both interest and principal repayments.