Question : Which of these statements is true?
Option 1: Under competitive asset market conditions, the price of a bond must always be equal to its present value in equilibrium.
Option 2: Under competitive asset market conditions, the price of a bond must be less than its present value to benefit the seller.
Option 3: Under competitive asset market conditions, the price of a bond must exceed its present value to benefit the buyer.
Option 4: Under competitive asset market conditions, the present value must exceed the price of a bond to benefit the seller.
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Correct Answer: Under competitive asset market conditions, the price of a bond must always be equal to its present value in equilibrium.
Solution : The correct option is under competitive asset market conditions the price of a bond must always be equal to its present value in equilibrium .
In competitive asset markets, the price of a bond will always be equal to its present value in equilibrium because market forces ensure that investors buy and sell bonds at prices that reflect their discounted future cash flows. This efficient pricing mechanism prevents arbitrage opportunities and promotes market stability.
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