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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 the future. There is a consistent and predictable relationship betina bond's coupon rate, ts par value, a bondholder's required return, and the bond's resulting intrinsic value. Trading at a discount, trading at a prer, and trading at par refer to particular relationship between a bond's intrinsic value and its par value. This also results from the relationship betwee 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 reflects the return 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'u par value, and its intrinsic value. These relationships can be summarized as follows: . When the bonds coupon rate is equal to the bondholder's required return the bond's intrinsic value wit equat its par value, and the band will trade at par When the bonds coupon rate is greater than the bondholders regured return, the band's intrinsic value will the bond will trade at a premium . When the bond's coupon rate is loss than the bondholder's required return, the bond's intrinsic value will be less than its par vale, and the bond its par value and will trade at For example, assume Jackson wants to earn a return of command is offered the opportunity to purchase a $1.000 par value bond that paysa 15.75 coupon rate (distributed semiannually) with the cars remaining to maturity. The following formula can be used to compute the band's intrinsic value: A-Z Intrinsie van + tera 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 Jackson's potential bond investment is currently exhibiting an intrinsic Based on this equation and the data, it is value greater than $1,000. > Based on this equation and the data, it is value greater than $1,000 to expect that Jackson's potential bond investment is currently exhibiting an intrinsic A-Z Now, consider the situation in which Jackson wants to a return of 13.75%, but the bond being considered for purchase offers a coupon rate of 15.75%. Again, assume that the bond pays seminterest payments and has three years to maturity. If you round the band's intric 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? 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 premium. 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 band's intrinsic value will be less than its par value Grade it Now Save & Continue Continue without
