Final answer:
The invoice price of a bond is equal to the present value of its future cash flows, and it can be calculated using the face value, coupon rate, time to maturity, and prevailing interest rate as inputs. If the market interest rate rises, the bond's price will be lower than its face value.
Step-by-step explanation:
The invoice price of a bond that a buyer would pay is equal to the present value of the bond's future cash flows. In other words, it is the discounted value of the bond's coupon payments and the principal repayment at maturity.
To calculate the invoice price of a bond, you need to know the bond's face value, coupon rate, time to maturity, and the prevailing interest rate in the market. Using these inputs, you can use the present value formula to determine the invoice price.
For example, let's say you have a bond with a face value of $1,000, a coupon rate of 8% (which means it pays $80 in coupon payments per year), and one year left until maturity. If the prevailing interest rate in the market rises to 12%, the bond becomes less attractive, so the seller will lower its price below the face value.