313.14
14. If the NPV of buying a bond is zero, does that mean it is a bad investment? EXPLAIN.(4)
No. It just means that you’re earning a fair rate of return on your money. You pay the PV of the cash flows for the bond, which means that when you net-out your cost of the bond with the value of the bond, its NPV will be 0. However, when computing the PV of those cash flows, you used a discount rate which represented your required rate of return on investments like the bond. Thus, the NPV of 0 simply means that you are earning your required rate of return. It’s not a bad investment, but it’s not a great investment either. A full credit answer had to identify that the discount rate used to get the NPV is your required rate of return and that earning it means you're earning a fair return.