Question

100,000 bonds bought at 80% must deposit ______ or ______

A) 20% profit, 100% loss.
B) 80% of face value, 20% of face value.
C) 100% of face value, 80% of face value.
D) 80% profit, 20% loss.

Answer 1

The correct answer is C) 100% of face value, 80% of face value, since the bonds are bought at 80% of their face value and upon maturity, the bonds will be redeemed at their full face value.

Step-by-step explanation:

The question at hand falls within the mathematical understanding of bonds and their pricing in the financial market. Specifically, the student is asking about the percentage of face value that must be deposited when 100,000 bonds are bought at 80%. After purchasing the bonds at a discount, there is an opportunity for the investor to receive the face value upon maturity. Moreover, the investor's total return would include both the interest payments and the capital gains realized.

If the bonds are bought at 80% of their face value, this would imply an initial outlay of 80% of the face value. Upon maturity, if the bonds are redeemed at their face value, the investor would receive 100% of the face value back, hence the correct answer to the student's question would be C) 100% of face value, 80% of face value. This scenario aligns with the principle that when interest rates rise, bonds previously issued at lower rates will sell for less than their face value in order to provide a competitive yield.