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 retum Remember, a band'y coupon rate partially determines the interest-based retum that a bond will pay, and a bondholder's required return reflects the return that a bondholder la obligated to receive from a given investment The mathematics of bond valuation imply a predictable relationship between the band'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 retum, the band's intrinsic value will equal its par value, and the band will trade exceed at par . When the band's coupon rate 's greater to the bondholder's required return, the band's intrinsic value will its par value, and the band 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 a discount For example, assume Sophia wants to earn a return of 6.00% and is offered the opportunity to purchase a $1,000 par value bond that pays a 10.50% coupon rate (distributed semiannually) with three years remaining to maturity. The following formula can be used to compute the bond's intrinsic value: For example, assume Sophia wants to earn a return of 6.00% and is offered the opportunity to purchase a $1,000 par value bond that pays a 10.50 coupon rota (distributed semiannually) with three years remaining to maturity. The following formula can be used to compute the bond's intrinse value: Intrinsic Value 3.0 + + cho 0.00 + HO . Complete the following table by identifying the appropriate corresponding variables used in the equation, Unknown Variable Value Variable Name Bond' semiannual coupon payment Bond's par value Semiannual required return B $1,000 to expect that Sophia's potential bond investment will exhibit an intrinsic value greater Based on this equation and the data, it is than $1,000 Now, consider the situation in which Sophia 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 matunity. If you round the band'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? than $1,000 Now, consider the situation in which Sophia 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? O When the coupon rate is less than Sophia's required return, the bond should trade at a discount. O A bond should trade at a par when the coupon rate is greater than Sophia's required return. When the coupon rate is less than Sophia's required return, the bond should trade at a premium. O When the coupon rate is greater than Sophia's required return, the bond's intrinsic value will be less than its par value. Grade It Now Save & Continue Continue without saving