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A student asks: "If a discount bond has a face value of $1,000, I don’t understand why anyonewho owns the bond would sell it for less than $1,000. After all, if the owner holds the bondto maturity, the owner knows he or she will receive $1,000, so why sell for less?" Answer thestudent’s question

Respuesta :

Answer:

The student has not factored into the submission the concept of time value of money

Explanation:

The concept of time value of money implies that cash at hand is worth more than an identical cash receivable  in future due to the fact the one at hand has the capacity to earn return if invested today.

Another reason why same amounts at different times are not equal is due inflation.The purchasing power of money deteriorates over time,$1000 in a year's time  would ultimately buy less basket of goods than the same amount today as a result inflation.

It would make sense to sell bond whose face is $1000 for less than that amount due above mentioned points.

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