For example, assume Oliver wants to earn a return of 12.00% and is offered the opportunity to purchase a $1,000 par value bond that pays a 10.00% 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 = + (10) (140) (140) (140) (1+0) (140) B (140) Complete the following table by identifying the appropriate corresponding variables used in the equation. Unknown Variable Name Variable Value B $1,000 Semiannual required return to expect that Oliver's potential bond investment is currently exhibiting an intrinsic Based on this equation and the data, it is value less than $1,000 Now, consider the situation in which Oliver wants to earn a return of 13%, but the bond being considered for purchase offers a coupon rate of 10.00%. 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 is Given your computation and conclusions, which of the following statements is true? When the coupon rate is less than Oliver's required return, the bond should trade at a premium. A bond should trade at par when the coupon rate is less than Oliver's required return. When the coupon rate is less than Oliver's required return, the bond should trade at a discount. When the coupon rate is less than Oliver's required return, the intrinsic value will be greater than its par value. Grade It Now Save & Continue