drop down options
1.) might or will
2.) obligated or would like
3.) be less than, exceed, or equal
4.) at a premium, at a discount, at par
5.) bonds semiannual coupon payment, bonds market price, bondholders required return
6.) $45, $72, $144, $180
7.) bonds market price, semiannual coupon payment, bonds par value
8.) 2.63%, 5.25, 10.5, 21%
9.) $947, $842, $1052, $421
10.) equal to, less than, more than
11.) a premium, par, a discount
8. Bond valuation The process of bond Valuation is based on the fundamental concept that the current price of a security can be determined by calculating the present value of the cash flows that the security will generate in the future. There is consistent and predictable relationship between a bond's coupon rate, its par value, a bondholder's required return, and the bord's resulting Intrinsic value. Trading at a discount, trading at a premium, and trading at par refer to particular relationships between a bond's intrinsic value and its par value. These result from the relationship between a bond's coupon rate and a bondholder's required rate of return Remember, a bond's coupon rate partially determines the interest-based return that a bond pay, and a bondholder's required retum reflects the retum that a bondholder 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 per 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 wil equal its par value, and the bond will trade at par. When the band's coupon rate is greater to the bondholder's required return, the bond's intrinsic value wit 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 For example, assume Jackson wants to earn a return of 10.50% and is offered the opportunity to purchase a $1,000 par value bond that paysa 9.00% 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 - Intrinsic value: Intrinsic Value - (140) + + (140) ato + do + () (1407 (+7 Complete the following table by identifying the appropriate corresponding variables used in the equation. "Unknown Variable Name Variable Value B $1,000 Semiannual required retum to expect that Jackson's potential bond investment will exhibit an intrinsic value greater Based on this equation and the data, it is than $1,000. Now, consider the situation in which Jackson wants to earn a return of 8%, but the bond being considered for purchase offers a coupon rate of 10% 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 its par value, so that the bond is trading at Given your computation and conclusions, which of the following statements is true? When the coupon rate is greater than Jackson's required return, the bond should trade at a premium. A bond should trade at a par when the coupon rate is greater than Jackson's required return. When the coupon rate is greater than Jackson's required return, the bond should trade at a discount. When the coupon rate is greater than Jackson's required return, the bond's intrinsic value will be us than its par value
