Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

I am not completely sure about the ones I have answered. 4. Bond valuation The process of bond valuation is based on the fundamental concept

image text in transcribedimage text in transcribedimage text in transcribedI am not completely sure about the ones I have answered.

4. 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 a consistent and predictable relationship between bond's coupon rate, its par value, bondholder's required return, and the bond's resulting premium, and trading at par refer to particular relationships between a bond's intrinsic value and its intrinsic value. Trading at a discount, trading at par value. This also results 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 will pay, and a bondholder's required return reflects the return that a bondholder is obligated 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 par 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 will equal its par value, and the bond will trade at par. When the bond's coupon rate is greater than the bondholder's required return, the bond's intrinsic value will exceed its par value, and premium the bond will trade at 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 at a discount For example, assume Ella wants to earn a return of 8.00% and is offered the opportunity to purchase a $1,000 par value bond that pays a 8.00% 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 +Cl Complete the following table by identifying the appropriate corresponding variables used in the equation Variable Name Variable Value Unknown A B $1,000 Bond's par value C Semiannual required return Based on this equation and the data, it is to expect that Ella's potential bond investment is currently exhibiting an intrinsic value equal to $1,000. Now, consider the situation in which Ella wants to earn a return of 11%, but the bond being considered for purchase offers a coupon rate of 8.00%. 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 (rounded to the nearest whole dollar) is nearest whole dollar, then its intrinsic value of its par value, so that the bond is Given your computation and conclusions, which of the following statements is true? A bond should trade at par when the coupon rate is less than Ella's required return. When the coupon rate is less than Ella's required return, the bond should trade at a discount. When the coupon rate is less than Ella's required return, the bond should trade at a premium When the coupon rate is less than Ella's required return, the intrinsic value will be greater than its par value

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Electronic Waste An Actual Gold And Silver Mine

Authors: Antonio Alcivar

1st Edition

979-8367641059

More Books

Students also viewed these Finance questions

Question

Describe Balor method and give the chemical reaction.

Answered: 1 week ago

Question

How to prepare washing soda from common salt?

Answered: 1 week ago