Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

please help in finding the solutions to each of these. TIA!! The process of bond valuation is bascd on the fundamental concept that the current

please help in finding the solutions to each of these. TIA!!
image text in transcribed
image text in transcribed
image text in transcribed
The process of bond valuation is bascd 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. 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 retum that a bond refiects the return that a bondholder to recelve 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 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 ot For example, assume Noah wants to eam a return of 15.75% and is offered the opportunity to purchase a $1,000 par value bond that pays a 13.50% coupon rate (distributed semiannually) with three years remaining to maturity. The following formula can be used to compute the bond's intrinsic For example, assume Noah wants to eam a feturn of 15.75% and is offered the opportunity to purchase a 51,000 par value bond that pays a 13.50% coupon rate (distributed semianniabily) with three years remaining to maturity. The following formula can be used to compute the bond's intrinsic value: IntrinaicValue=(1+CA+(1+C2A+(1+C3A+(1+C)2A+(0+C)2A+(1+C2A+(1+C)nA Complete the following table by identifying the appropriate corresponding variables used in the equation. Based on this equation and the data, it is to expect that Noah's potential bond investment is currently exhibiting an intrinsic value greater than $1,000. Now, consider the situation in which Noah wants to earn a return of 11.50%, but the bond being considered for purchase offers a coupon rate of 13.50\%. 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 intrins value of (rounded to the nearest whole doliar) is its par value, 50 that the bond is Based on this equation and the data, it is to expect that Noah's potential bond imvestment is currently exhibiting an intrinsic value greater than $1,000. Now, consider the situation in which Noah wants to earn a return of 11.50%, but the bond being considered for purchase offers a coupon rate of 13.50\%. 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 greater than Noah's required return, the bond should trade at a premium. When the coupon rote is greater than Noah's required return, the bond should trade at a discount. A bond should trade at a par when the coupon rate is greater than Noah's required return. When the coupon rate is greater than Noah's required return, the bond's intrinsic value wi be less 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

Beyond Greed And Fear Understanding Behavioral Finance And The Psychology Of Investing

Authors: Hersh Shefrin

1st Edition

0195161211, 978-0195161212

More Books

Students also viewed these Finance questions