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 band's intrinsic value and its par value. These ese result from the relationship between a bond's coupon rate and a boncholder's required rate of return. Remember, a bond's coupon rate partially determines the interest-based return that a bond pey, 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, the band's per value, and is intrinsic value. These relationships can be summarized as pows: . When the bond's coupon rate is equal to the bondholder's required return, the band's frisk ved is per value, and the bond will trade at par. . When the bond's coupon rate is greater than the bondholder's required return, the bone's three par vals, and the band will trade at a premium. . When the bond's coupon rate is less than the bondholder's required return, the boneka be less than is per value, and the bond will trade For example, assume Noah wants to earn a return of 15.75 and is offered the coportunity to purchase a 1,000 per value bond that pays a 18.00% Coupon rate (distributed serially) with three years remaning to murity. The following formule can be used to compute the bones intrinse Value ( ' ' ' ' Complete the following table by entifying the appropriate correcting as the con Unknown Var Name $1.00 C SEN 2 3 $ 4 % 5 & 7 B W E R T Y u O o S F G H J K L N C V B . N M V - * For example, assume Noah wants to earn a return of 15.75% and is offered the opportunity to purchase a $1,000 par value bond that pays a 18.00% coupon rate (distributed semiannually) with three years remaining to maturity. The following formula can be used to compute the bond's intrinsic value: Intrinsic Value (1++ (1+33 + auto+ (167 + (1+ C + (1+Cj6 + ( + C) 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 Based on this equation and the data, it is less than $1,000 to expect that Noah's potential bond investment is currently exhibiting an intrinsic value Now, consider the situation in which Noah wants to earn a return of 16,00%, but the bond being considered for purchase offers a coupon rate of 18.00%. 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? O When the coupon rate is greater than Noah's required return, the bond should trade at a discount. When the coupon rate is greater than Noah's required return, the bond should trade at a premium When the coupon rate is greater than Noah's required return, the bond's intrinsic value will be less than its par value. A bond should trade at a par when the coupon rate is greater than Noah's required return 30 # W* $ * 2 % 5 6 7 8 Q E R T Y
