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 band'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 band's coupon rate partially determines the Interest-based return that a bond pay, and a bondholder's required retur 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 par value, and its intrinsic value. These relationships can be summarized as follows: When the band's coupon rate is equal to the bondholder's required return, the band's intrinsic value will equal its par valve, and the band will tradet par When the band's coupon rate is greater than the bondholder's required return, the band's intrinsic value wil its par value, and the bond will trade at a premium . When the band'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 For example, assume Llam wants to earn a return of 8.75% 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 band's intrinsic value: B Intrinsic Value = + Ac+ +44cm + 14cm + 14cm + 146* *11*cp + +CP Complete the following table by identifying the appropriate corresponding variables used in the equation. Unknown Variable Name Variable Value A B $1,000 Semiannual required return to expect that Liam's potential bond investment is currently exhibiting an intridsie value Based on this equation and the data, it is greater than $1,000 Now, consider the situation in which Liam wants to earn a return of 11%, but the bond being considered for purchase offers a coupon rate of 7.50%. Again, assume that the bond pays semiannual interest payments and has three years to maturity. If you round the band'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 to expect that Llar's potential bond Investment is currently exhibiting an intrinsic value Based on this equation and the data, it is greater than $1,000 Now, consider the situation in which Liam wants to earn a return of 11%, but the bond being considered for purchase offers a coupon rate of 7.50%. 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 Liam's required return, the bond should trade at a discount. A bond should trade at par when the coupon rate is greater than Liam's required return. When the coupon rate is greater than Lam's required return, the bond should trade at a premium. When the coupon rate is greater than Lam's required retum, the bond's intrinsic value will be less than its par value. What will happen to the price of a fixed-rate bond when expectations for inflation fall? The bond price will fall. The bond price will rise