When it comes to Discounted Cash Flow (DCF) methodologies and bonds, which of the following is TRUE?

[A] Using compounding, we can figure out the Net Present Value (NPV) of a bond.

[B] Using discounting, we can figure out the NPV of a bond.

[C] The price of a bond is entirely dependent upon the bond's NPV.

[D] The price of a bond is entirely unrelated to the bond's NPV.

Question

Business

Brooklyn Walter

Today, 08:03

When it comes to Discounted Cash Flow (DCF) methodologies and bonds, which of the following is TRUE?

[A] Using compounding, we can figure out the Net Present Value (NPV) of a bond.

[B] Using discounting, we can figure out the NPV of a bond.

[C] The price of a bond is entirely dependent upon the bond's NPV.

[D] The price of a bond is entirely unrelated to the bond's NPV.

+2

Answers (1)

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Arjun · Answer 1

[B] Using discounting, we can figure out the NPV of a bond

Explanation:

First, a similarity between Discounted Cash Flow (DCF) and Net Present Value (NPV) that is crucial to answering this question is their reliance on discounted future cash flows in determining the present value of a project.

Although, the NPC and the DCF are crucial in decision making about a future project or investment, the difference is that DCF is useful in analyzing the present value of projects future cash flow while, NPV is interested in calculating the expected net returns in the future on an investment minus the startup costs.

Since a bond is an investment, Discounting and NPV can be used to determine the present/today's value of the future returns of the bond.

Therefore, it stands to reason that the price of a bond is not entirely dependent upon the bond's NPV and at the same time the price of a bond is not entirely unrelated to the bond's NPV. NPV uses the price of the bond among other inputs such as interest and years involved to determine the present value of the future returns on the bond.