Question
Complete the following table by identifying the appropriate corresponding variables used in the equation. Unknown Variable Name Variable Value A Bonds semiannual coupon payment $43.75
Complete the following table by identifying the appropriate corresponding variables used in the equation.
Unknown | Variable Name | Variable Value |
---|---|---|
A | Bonds semiannual coupon payment | $43.75 |
B | Bonds par value | $1,000 |
C | Semiannual required return | 5.2500% |
Based on this equation and the data, it is _________ (reasonable or unreasonable) to expect that Noahs potential bond investment is currently exhibiting an intrinsic value less than $1,000.
Now, consider the situation in which Noah wants to earn a return of 12%, but the bond being considered for purchase offers a coupon rate of 8.75%. Again, assume that the bond pays semiannual interest payments and has three years to maturity. If you round the bonds intrinsic value to the nearest whole dollar, then its intrinsic value of ________ ($644 or $920 or $736 or $1,196) (rounded to the nearest whole dollar) is ______ (greater than, equal, or less than) its par value, so that the bond is ________ (trading at a premium, trading at a discount, or trading at a par)
Given your computation and conclusions, which of the following statements is true?
A bond should trade at a par when the coupon rate is greater than Noahs required return.
When the coupon rate is greater than Noahs required return, the bond should trade at a premium.
When the coupon rate is greater than Noahs required return, the bond should trade at a discount.
When the coupon rate is greater than Noahs required return, the bonds intrinsic value will be less than its par value.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started