4. Bond valuation Aa Aa The process of bond valuation is based on the fundamental concept that the aurrent price of a security can be determined by calculating the pres 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 value, a bondholder's required return, and the bond's resulting intrinsic value. Trading at a discount, trading at a premium, and trading at par refer to particular relationships between a bond's intrinsi value and its par value. These result from the relationship between a bond's coupon rate and a bondholder's required rate of return. will pay, and a bondholder's required return Remember, a bond's coupon rate partially determines the interest-based return that a bond reflects the return that a bondholder would like to receive from a given investment. The mathematics of bond valuation imply a predictable relationship between the bond's coupon rate, the bondholder's required return, the bond's 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 to 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 bond will trade at a discount For example, assume Sophia wants to earn a return of 8.00% and is offered the opportunity to purchase a $1,000 par value bond that pays a 8.009 coupon rate (distributed semiannually) with three years remaining to maturity. The following formula can be used to compute the bond's intrinsic