Remember, a bonds coupon rate partially determines the interest-based return that a bond selector 1

• will
• might

pay, and a bondholders required return reflects the return that a bondholder selector 2

• is obligated
• would like

to receive from a given investment. Points:

Close Explanation Explanation:

The mathematics of bond valuation imply a predictable relationship between the bonds coupon rate, the bondholders required return, the bonds par value, and its intrinsic value. These relationships can be summarized as follows:

	When the bonds coupon rate is equal to the bondholders required return, the bonds intrinsic value will equal its par value, and the bond will trade at par.
	When the bonds coupon rate is greater to the bondholders required return, the bonds intrinsic value will selector 1 exceed be less than equal its par value, and the bond will trade at a premium.
	When the bonds coupon rate is less than the bondholders required return, the bonds intrinsic value will be less than its par value, and the bond will trade selector 2 at a discount at a premium at par .

Points: For example, assume Sophia wants to earn a return of 9.00% and is offered the opportunity to purchase a $1,000 par value bond that pays a 7.50% coupon rate (distributed semiannually) with three years remaining to maturity. The following formula can be used to compute the bonds intrinsic value:

Complete the following table by identifying the appropriate corresponding variables used in the equation.

A	selector 1 Bonds annual coupon payment Bonds semiannual coupon payment Bondholders required return	selector 2 $40.00 $64.00 $128.00 $160.00
B	selector 3 Bonds annual coupon payment Bonds par value Bonds market price	$1,000
C	Semiannual required return	selector 4 2.25% 4.50% 13.50% 18.00%

Points: Based on this equation and the data, it is selector 1

• reasonable
• unreasonable

to expect that Sophias potential bond investment will exhibit an intrinsic value less than $1,000. Points: Close Explanation Explanation:

Now, consider the situation in which Sophia wants to earn a return of 10%, but the bond being considered for purchase offers a coupon rate of 12%. 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 selector 1

• $631
• $420
• $1,051
• $1,366

is selector 2

• equal to
• greater than
• less than

its par value, so that the bond is trading at selector 3

• a premium
• a discount
• par

. Points: 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 Sophias required return. When the coupon rate is greater than Sophias required return, the bond should trade at a discount. When the coupon rate is greater than Sophias required return, the bonds intrinsic value will be less than its par value. When the coupon rate is greater than Sophias required return, the bond should trade at a premium