3. Bond Valuation

For example, assume Sophia wants to earn a return of 14.00% and is offered the opportunity to purchase a $1,000 par value bond that pays a 16.00% coupon rate (distributed semiannually) with three years remaining to maturity. The following formula can be used to compute the bond's intrinsic value: Intrinsic Value = B (1+C) (1+C) (1+C) (1+0) (1+C)5+ (1+0)6 (1+C)6 A B + Unknown Variable Name + Complete the following table by identifying the appropriate corresponding variables used in the equation. + Bond's par value Semiannual required return + Bond's semiannual coupon payment Based on this equation and the data, it is value less than $1,000. + Variable Value $80.00 $1,000 7.0000% to expect that Sophia's potential bond investment is currently exhibiting an intrinsic Now, consider the situation in which Sophia wants to earn a return of 19%, but the bond being considered for purchase offers a coupon rate of 16.00%. Again, assume that the bond pays semiannual interest payments and has three years to maturity. If you round the bond's intrinsic value to the nearest whole dollar, then its intrinsic value of (rounded to the nearest whole dollar) is its par value, so that the bond is Given your computation and conclusions, which of the following statements is true? O A bond should trade at par when the coupon rate is less than Sophia's required return. O When the coupon rate is less than Sophia's required return, the intrinsic value will be greater than its par value. O When the coupon rate is less than Sophia's required return, the bond should trade at a premium. O When the coupon rate is less than Sophia's required return, the bond should trade at a discount