The rate of interest used to discount the bond’s cash flow is known as :
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → yield to maturity
The value of a bond is the present value of its cash flows (the coupons and the redemption value). The rate used to discount these cash flows is the rate of return the market expects from the bond, called the yield to maturity.
Why the other options are incorrect
Option (2) coupon rate — Incorrect. The coupon rate fixes the size of the interest payments; it is not the discount rate.
Option (3) face value — Incorrect. The face value is an amount of money (the par value of the bond), not a rate.
Option (4) coupon value — Incorrect. This is the amount of each interest payment, one of the cash flows being discounted.
CBSE Applied Mathematics (Class XII):
Valuation of Bonds
