That amount of money which, if kept today in an interest-earning project, would generate the same income as the sum promised by a bond over its lifetime, is called the bond’s:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → present value
A bond promises sums in future years. The amount which, kept today at interest, would earn the same is the bond’s present value. In equilibrium a bond’s price equals its present value.
Option (1) present value — Correct. This is the definition in the question.
Option (2) face value — Incorrect. This is the amount borrowed on the bond, Rs 100 in the book’s example.
Option (3) coupon rate — Incorrect. This is the yearly return the bond promises as a percentage of face value.
Option (4) capital gain — Incorrect. This is the rise in a bondholder’s wealth when the bond price rises.
NCERT (2026-27): “The Speculative Motive … Consider the following two-period bond. A firm wishes to raise a loan of Rs 100 from the public. It issues a bond that assures Rs 10 at the end of the first year and Rs 10 plus the principal of Rs 100 at the end of the second year. Such a bond is said to have a face value of Rs 100, a maturity period of two years and a coupon rate of 10 per cent. …” Glossary: “Present value (of a bond) - That amount of money which, if kept today in an interest earning project, would generate the same income as the sum promised by a bond over its lifetime.” |