Bond Valuation:

For example, assume Noah wants to earn a return of 14.00% and is offered the opportunity to purchase a $1,000 par 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 intrinsic value: Intrinsic Value - Complete the following table by identifying the appropriate corresponding variables used in the equation Unknown Variable Name Bond's semiannual coupon payment Bond's par value Semiannual required return Variable Value $1,000 7.0000% Based on this equation and the data, it is greater than $1,000 reasonable to expect that Noah's potential bond investment is currently exhibiting an intrinsic value Now, consider the situation in which Noah 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 $1,116 (rounded to the nearest whole dollar) is greater than its par value, so that the bond is trading at a premium . Given your computation and conclusions, which of the following statements is true? O When the coupon rate is greater than Noah's required return, the bond should trade at a premium when the coupon rate is greater than Noah's required return, the bond should trade at a discount. O A bond should trade at a 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's intrinsic value will be less than its par value