3. Bond valuation The process of bond valuation is based on the fundamental concept that the current price of a security can be determined by calculating the present value of the cash flows that the security will generate in the future. There is a consistent and predictable relationship between a bond's coupon rate, its par valut, a bondholder's required return, and the bonds resulting intrinsic value. Trading at a discount, trading at a premium, and trading at par refer to particular relationships between a bond's intrinse valor and its par value. This also results from the relationship between a bord's coupon rate and a bondholder's required rate of return Remember, a bond's coupon rate partially determines the interest-based return that a bond will reflects the return that a bondholder to receive from a given investment pay, and a bondholder's required return The mathematics of bond valuation imply a predictable relationship between the bond's coupon rate, the bondholder's requered return, the bond's par value, and its intrinsic value. These relationships can be summarized as follows: When the bond's coupon rate is equal to the bondholder's required return, the bond's intrinsic value will equal its par value, and the bond will trade at par When the bond's coupon rate is greater than the bondholder's required return, the bond's intrinsic value will be less than its par value, and the bond will trade at a premium . When the bond's coupon rate is less than the bondholder's required return, the bond's intrinsic value will be less than its par value and the band The mathematics of bond valuation imply a predictable relationship between the bond's coupon rate, the bondholder's required return, the bond's par value, and its intrinsic value. These relationships can be summarized as follows: When the bond's coupon rate is equal to the bondholder's required return, the bond's intrinsic value will equal its par value, and the bond will trade at par . When the band's coupon rate is greater than the bondholder's required return, the bond's intrinsic value will be less than its par value, and the bond will trade at a premium When the bond's coupon rate is less than the bondholder's required return, the bond's intrinsic value will be less than its par value, and the band will trade at a discount For example, assume Grace wants to com a return of 10.50% and is offered the opportunity to purchase a $1,000 per value bond that pays a 12.00% coupon rate (distributed semiannually) with three years remaining to maturity. The following formula can be used to compute the bond's intrinsie value Intrinsic Value dock + 4 +0*+p++ep+uverture Complete the following table by identifying the appropriate corresponding variables used in the equation, Unknown Variable Value A Variable Name Bond's semiannual coupon payment Bond's par value Semiannual required return B $60.00 $1,000 Based on this equation and the data, it is reasonable less than $1,000 to expect that Grace's potential bond investment is currently exhibiting an intrinsic value Now, consider the situation in which Grace wants to earn a return of 15%, but the bond being considered for purchase offers a coupon rate of 12.00% 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 per value, so that the bond Given your computation and conclusions, which of the following statements is true? When the coupon rate is greater than Grace's required return, the bond should trade at a premium A bond should trade at par when the coupon rate is greater than Grace's required return When the coupon rate is greater than Grace's required return, the bond should trade at a discount When the coupon rate is greater than Grace's required return, the bonds intrinsic value will be less than its par value. What will happen to the price of a fixed rate bond when expectations for inflation rise? The bond price will fall The bond price will rise