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 its future cash flows.

A bond's coupon rate determines the interest$-$based return that a bond $$

$$ pay, and a bondholder's required rate of return reflects the return that a bondholder $q,$

$$ receive from the investment.

Bond valuation implies a relationship between the bondholder's required rate of return, the bond's coupon rate, and the bond's par value. These relationships can be summarized as follows:

Relationships

When the bond's coupon rate is equal to the bondholder's required return, the bond will trade at $$ When the bond's coupon rate is greater than the bondholder's required return, the bond will trade at $$ When the bond's coupon rate is less than the bondholder's required return, the bond will trade at $$ Suppose Kevin wants to earn a return of $14\mathrm{.}00$ percent and is offered the opportunity to purchase a $$1,000$ par value bond that pays a $12\mathrm{.}25$ percent coupon rate $($distributed semiannually$)$ and has three years remaining to maturity.