Final answer:
The present values of a bond's principal and interest payments are determined using the market rate of interest, which reflects the current borrowing cost and opportunity cost for investors.
Step-by-step explanation:
The selling price of a bond is determined by calculating the present value of both the principal and the periodic interest payments. These present values are ascertained by utilizing the market rate of interest, not the stated, nominal, or coupon rate. The market rate, also known as the discount rate, is used because it reflects the current cost of borrowing in the market and is considered the opportunity cost for the investor. This rate takes into account the various market factors such as the riskiness of the borrower repaying the loan and the prevailing interest rates, which affect the bond's real-world price.