Aa 5. Bond valuation The process of band valuation is based on the fundamental conoept chat the ourest price of a security can be detarnined by calculating the precent vaue of the cash fows that the securty will generate in the future There is a consistent and predictable relationship betwoen a bands coupont rate, its per value, a bondhaiders required ratum, and the band's resulting atrinsk vaiue. Trading at a discount, trading at a premiom, and trading at par refer to perticular ralatonships betbween a bond's intrinsic value and its par value. These result froin the rolationship bebwoen a bond's coupon rate and a bondholders required rate of rstum. pay, and a bondhoiders required retum roflects Remember, a bond's coupon rote partialy determines the interest-based retum chat a bond the rotum that a bondhoider to racolve from a given investment The mathem atics of band vauation inply a predctable relatiooshp betseen the bond's coupon rate, the bondholder's required retum, the bond's par value, and its intresic value. These : relationships can be summanized as folos - When the bond's coupen rato is equal to the bondhoider's required return, the bond's intrinalc vaue will equal its par value, and the band wil trade at par when the bond's coupon rate is greater than the bondnaicer's reqired retum, the bond's intrinsic value wi aarvalue, and the band wil trade at a preni its :when the bond s coupon rate is less than the bandhoider's requ red retum, the bend's intresic vaue sil be less than its par value, and the band wll trade at For example, assume Testawants to earn retuni of 10.50% and is afered the opportunity te purchase a$1,000 aar vabe bend that aavia gao% coupon rate (distrioured seiannualy) with three years remaining to maturity The toloning forinuia can be used to compute the bonds incrinsc value Ineninak valus - Complate the tolilowing table by identifiying the appropriate correspording varlables used in tne equabon variable Value 1,000 Desed on this equaton and the dara, it is greater tnan ,00D to NON, consder the situation 1n 'nrich Tesfosants t eam argum, o, 12%, buttnq bono being conerered frpur hasefar Agar, assume tnat the bond pas saminnal nterest payments and has tree rem tomatuity f wou m it the bcros whale dolar, then its incrinsc value of Given your com putation ang condusions, which of one folosingrents is trua? O witen the coupen rate is groater thanesasrecune rue bena's ras lueibe ehen its oar val O Abond should trade at par when the coupon rate is grestor snan Tes red eun ccupon rate is greater than Tesfu's rucuired reurn. tre beng suld bacp ata discound O when the coupon rate is greater then Testols reined ruhe bercarpud ta ara what will happen to the price of a fixe-te bond when ex O Tre band price will ris O Te bored prio vai fall