The true interest rate used by investors to value a bond is called the: A) Face...

The true interest rate used by investors to value a bond is called the:

A) Face interest rate.

B) Cash payment rate.

C) Market interest rate.

D) Stated interest rate.

Solutions

Expert Solution

Solution:

Option C (Market Interest Rate) is the correct option.

Explanation:

The market interest rate is referred to as the current interest rate offered on bonds. The market interest rate will be constantly changing due to several factors like economic conditions in the country. If the investor wants to buy a bond, he should look at the prevailing/current interest rate that the bond yields. With the market interest rate, he can assess the yield he is going to get if he invests in that bond. Therefore, the true interest rate to value a bond by investors is the market interest rate.

Option A is not correct because it is the rate quoted in the bond i.e., the interest rate on the face value of the bond

Option B is not correct because it is the cash payment rate and does not help in valuation of bond

Option D is not correct because it is the rate used to calculate the cash payments for interest that is usually quoted in the bond contract.

ekkarill92 answered 1 year ago

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