Final answer:
The current price of a bond is the present value of the future interest and par value at maturity cash flows discounted at the prevailing market interest rate.
Step-by-step explanation:
The correct answer is Option B: the present value of the future interest and par value at maturity cash flows discounted at the prevailing market interest rate.
In finance, the price of a bond is determined by calculating the present value of its future cash flows, which include the interest payments and the par value that is paid at maturity.
The present value is calculated by discounting these cash flows at the prevailing market interest rate.
For example, suppose a bond has a par value of $1,000, a coupon rate of 5%, and a maturity period of 5 years. The prevailing market interest rate is 3%.
To determine the current price of the bond, we would calculate the present value of the bond's cash flows using the formula:
Price = (Coupon Payment / (1 + Market Interest Rate)^1) + (Coupon Payment / (1 + Market Interest Rate)^2) + ... + (Coupon Payment + Par Value / (1 + Market Interest Rate)^n)
where Coupon Payment is the coupon rate multiplied by the par value, and n is the number of years to maturity.