Question

Which of the following are needed to determine the appropriate value of a bond?

I. required rate of return
II. time to maturity
III. frequency of interest payments
IV. coupon rate
A) II and III only
B) III and IV only
C) II, III and IV only
D) I, II, III and IV

Answer 1

To determine the appropriate value of a bond, you need to consider the required rate of return, time to maturity, frequency of interest payments, and coupon rate.

Step-by-step explanation:

To determine the appropriate value of a bond, several factors are needed:

1. Required rate of return: This is the rate of return that an investor expects to receive from the bond. It takes into account factors such as inflation and the riskiness of the borrower.
2. Time to maturity: This is the length of time until the bond reaches its maturity date, when the borrower will pay back the face value.
3. Frequency of interest payments: This refers to how often the borrower makes interest payments to the bondholder. It affects the overall return on the bond.
4. Coupon rate: This is the interest rate that the bond pays to the bondholder. It is usually stated as an annual percentage.

By considering these factors, investors can determine the present value of a bond, which is the most they would be willing to pay for it.