Read each statement below indicate if it true or false, and give a brief explana

Question

Read each statement below indicate if it true or false, and give a brief explanation of your answer.

1. When a bond is sold at a discount, the cash received is less than the present value of the future cash flows from the bond, based on the market rate of interest on the date of issue.

A the discount amount equals to the difference between the cash received and the present value of the future cash flows.

B. the cash received is more than the present value of the future cash flows.

C. the cash received is equal to the present value of the future cash flows.

D. because the market rate of interest is used when calculating the present value of the future cash flows.

Explanation / Answer

When a bond is sold at a discount, it means that it is trading at a discount as compared to the face value of the bond. For ex, if the Face value of the bond is $1000, it would be said to be sold at a discount if it is sold at a price lesser than $1000. This situation arises when the market rate of interest is higher and that rate is used to discount the future cash flows. The present value of the bond is equal to the future cash flows from the bond discounted at the market rate of interest. And the cash flow received would be equal to the present value of the bond.

Based on the above explanation option C and D are TRUE , A and B are FALSE.

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