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Complete the following table by identifying the appropriate corresponding variables used in the equation Unknown Variable Name Variable Value A B $1,000 Semiannual required return Based on this equation and the data, it is than $1,000 to expect that Ella's potential bond investment will exhibit an intrinsic value greater 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%. 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 less than Ella's required return the bond should trade at a discount. When the coupon rate is greater than Ella's required return the band's intrinsic value will be less than its par value. When the coupon rate is less than Ella's required return, the bond should trade at a premium. A bond should trade at a par when the coupon rate is greater than Ella's required return. 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 a consistent and predictable relationship between a bond's coupon rate, its par value, a bondholder's required retum, and the bond'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. pay, and a bondholder's required return Remember a bond's coupon rate partially determines the interest-based return that a bond will reflects the return that a bondholder would like 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 band's coupon rate is equal to the bondholder's required return, the bond's intrinsic value will equal its par valve, and the bond will trade at par acceed . When the bond's coupon rate is greater to the bondholder's required return, the bond's intrinsic value will 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 at par For example, assume Ella wants to sam a return of 8.75% and is offered the opportunity to purchase a $1,000 par volue bond that paysa 7.50% coupon rate (distributed annually) with three years remaining to maturity. The following formula can be used to compute the bond's intrinsic values Festival ++ + HO ruct D + DC H) Complete the following table by identifying the appropriate corresponding variables used in the equation, Variable Value Unknown Variable Name Bond's mal coupon payment $1.000 C Semiannual required return to expect that Elle's potential band ment will exhibit an intrinse value greater Based on this tion and the data, it is than $1.000 Now.consider the station in which Ella arts to earn a return of 115, but the band being considered for purchase offers a coupon arts of Again asume that the bond pas manual interest payments and has three years to maturity. If you round the bonds its value to the na hole do that this value of its par le so that the bond is trading Give your computation and conclusions, which of the following statement is true? When the CD than Ella's required return the bond should trade atacount. when the contes greater than El required return the band's invalue wil behandlar When the contestan las ruired return the bond should tradem A bond moet when the coupon rate is greater than Eserder Complete the following table by identifying the appropriate corresponding variables used in the equation, Unknown Variable Name Bond's annual coupon payment Variable Value