Which of the following are the four variables required to calculate the value of a bond?

• A. Face value, dividend rate, inflation rate, and time since issuance
• B. Coupon rate, stock price, maturity date, and credit rating
• C. Market price, coupon payment, par value, and number of bondholders
• D. Face value, coupon rate, market interest rate (yield to maturity), and time to maturity

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the concept of bond valuation. Bonds are financial instruments that represent a loan made by an investor to a borrower. The value of a bond is determined by several key variables that influence its price and yield.
2. Step 2: Identify the four variables required to calculate the value of a bond. These are: (1) Face value (the principal amount to be repaid at maturity), (2) Coupon rate (the annual interest rate paid on the bond), (3) Market interest rate (also known as yield to maturity, which reflects the current market rate for similar bonds), and (4) Time to maturity (the remaining time until the bond's principal is repaid).
3. Step 3: Recognize why these variables are important. The face value determines the amount repaid at maturity, the coupon rate determines periodic interest payments, the market interest rate reflects the bond's attractiveness compared to other investments, and the time to maturity affects the present value of future cash flows.
4. Step 4: Exclude irrelevant variables. For example, dividend rate, inflation rate, stock price, credit rating, and number of bondholders are not directly used in bond valuation calculations. Focus only on the four key variables mentioned above.
5. Step 5: Apply these variables in the bond valuation formula. The formula typically involves calculating the present value of the bond's future coupon payments and the present value of its face value at maturity, using the market interest rate as the discount rate. Use the formula: PV = Σ (C / (1 + r)^t) + (FV / (1 + r)^T), where PV is the bond's price, C is the coupon payment, r is the market interest rate, t is the time period, FV is the face value, and T is the time to maturity.