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 return, 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. Remember, a bond's coupon rate partially determines the interest-based return that a bond pay, and a bondholder's required return 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, value, and its intrinsic value. These relationship can be summarized as follows: When the bond's coupon rate is equal to the bondholder's required return, the bond's intrinsic value equal its par value, and the bond will trade at par. When the bond's coupon race 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 then the bondholder's required return, the bond's intrinsic value will be less then its per value, and the bond will trade at. For example, assume Jackson wants to earn a return of 8.75% end is offered the opportunity to purchase of 51, 000 per value bond that pays + 7.50% coupon rate (distributed semiannually) with three years remaining to maturity. The following formula can be used to compute the bond's intrinsic