5. Bond valuation The price of bond Valuation is based on the fundamental concert that the current price of security can be determined by calling the present value of the cash flows that the security will generate in the future. There is a constant and predictable relationship between bondscoupon rate its par vakar tender's order, and the bordesting intrinsic vahe Trading at a discount, trading at a premium, and trading at par vele to particulationship between bondo and its par value. This also results from the relationship between bondscoupon rate and a bondholder's reedte of return Itemember a bond's coupon ute partially determines the bad en that will pay and a bondholdere reflects the return that a bondholder would like to receive from a given investment The mathematics of bond valuation imply a predictable relations between the bonds coupon rate the bondholder required return the band's por value, and intrinsic value. These tionships can be mad as folle When the bond's coupon rate is equal to the bondholder required return the band's in value will equalis per value and the band will trade at par When the bondscoupon rate is greater than the bondholder's rated team, the band's trinsic value will exceed wits par value, and tertion will trade at a premium When the bond coupon rate is less than the bondholder's requred return, the bond's intrinsic value will be less than its par value and the bond will trade at a discount For example, assume Noah wants to earn a return of 10.50% and is offered the opportunity to purchase a $1,000 par vale bond that pays a 9.00% coupon rute (stributed semiannually) with three years remaining to maturity. The following formule can be used to compute the bonds intrins Value: Intrinsic Value = macy + notare + (1.04 + + meer op + 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 $1,000 to expect that Noah's potential bond investment is currently exhibiting an intrinsic value Based on this equation and the data, it is greater than $1,000 Now, consider the situation in which Noah wants to earn a return of 6.00%, but the bond being considered for purchase offers a coupon rate of 9.00%. 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 Given your computation and conclusions, which of the following statements is true? When the coupon rate is greater than Noah's required return, the bond's intrinsic value will be less than its par value. When the coupon rate is greater than Noah's required return, the bond should trade at a discount A bond should trade at par when the coupon rate is greater than Noah's required return When the coupon rate is greater than Noah's required return, the bond should trade at a premium 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. 5. Bond valuation The price of bond Valuation is based on the fundamental concert that the current price of security can be determined by calling the present value of the cash flows that the security will generate in the future. There is a constant and predictable relationship between bondscoupon rate its par vakar tender's order, and the bordesting intrinsic vahe Trading at a discount, trading at a premium, and trading at par vele to particulationship between bondo and its par value. This also results from the relationship between bondscoupon rate and a bondholder's reedte of return Itemember a bond's coupon ute partially determines the bad en that will pay and a bondholdere reflects the return that a bondholder would like to receive from a given investment The mathematics of bond valuation imply a predictable relations between the bonds coupon rate the bondholder required return the band's por value, and intrinsic value. These tionships can be mad as folle When the bond's coupon rate is equal to the bondholder required return the band's in value will equalis per value and the band will trade at par When the bondscoupon rate is greater than the bondholder's rated team, the band's trinsic value will exceed wits par value, and tertion will trade at a premium When the bond coupon rate is less than the bondholder's requred return, the bond's intrinsic value will be less than its par value and the bond will trade at a discount For example, assume Noah wants to earn a return of 10.50% and is offered the opportunity to purchase a $1,000 par vale bond that pays a 9.00% coupon rute (stributed semiannually) with three years remaining to maturity. The following formule can be used to compute the bonds intrins Value: Intrinsic Value = macy + notare + (1.04 + + meer op + 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 $1,000 to expect that Noah's potential bond investment is currently exhibiting an intrinsic value Based on this equation and the data, it is greater than $1,000 Now, consider the situation in which Noah wants to earn a return of 6.00%, but the bond being considered for purchase offers a coupon rate of 9.00%. 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 Given your computation and conclusions, which of the following statements is true? When the coupon rate is greater than Noah's required return, the bond's intrinsic value will be less than its par value. When the coupon rate is greater than Noah's required return, the bond should trade at a discount A bond should trade at par when the coupon rate is greater than Noah's required return When the coupon rate is greater than Noah's required return, the bond should trade at a premium 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