Financial Accounting and Reporting-CPA Practice Exam

What aspect does the bond selling price reflect?

1. Current cash equivalent of the bond

2. The amount paid at maturity

3. Only the accrued interest to date

4. The historical cost of the bonds

The correct answer is: Current cash equivalent of the bond

The bond selling price reflects the current cash equivalent of the bond. This means it represents the amount an investor is willing to pay for the bond at the time of sale, which is influenced by factors such as market interest rates, the bond's coupon rate, its credit quality, and the time remaining until maturity. When interest rates in the market rise, the selling price of existing bonds will typically fall, as new bonds may be issued at these higher rates, making older bonds less attractive. Conversely, if the market interest rates decline, the selling price of existing bonds will generally increase. This current cash equivalent is the present value of the bond's future cash flows—both the periodic coupon payments and the face value at maturity—discounted at the market interest rate. The other aspects mentioned, such as the amount paid at maturity or only the accrued interest to date, do not encompass the full scope of what the bond selling price represents. The historical cost of bonds is also not relevant when discussing their current selling price, as it does not reflect the market valuation that investors are willing to assign at any given point in time. Thus, the current cash equivalent captures the essence of the bond's value in a dynamic financial market.