323.4
4.If bonds are priced correctly, does a bond selling at a
discount have a positive NPV? EXPLAIN. (3)
No. If bonds are priced correctly, the price of the bond is equal to the present value of its cash flows. Thus, investing in the bond is a zero NPV project. That doesn’t mean it’s a bad investment. In calculating the PV of the bond’s cash flows, you impose a certain required rate of return for investments like the bond. Buying the bond at the PV of these cash flows means that you are earning a fair return on your money—nothing great, nothing bad. A bond with coupons that are too small must sell at a discount in order to make buying it a fair deal (Zero NPV)—if it did not sell at a discount, it would be a negative NPV project!