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 wil 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 relationship between a bond's intrinae value and its par value. This ako results 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 will reflects the return that a bond older would like to receive from a given vestment pay, and a bondholdere required return The mathematics of bond valuation imply a predictable relationship between the body coupon rate, the bondholder's required return, the bond par value, and its intrinsic value. These relationships can be summarized at follows: exceed When the band's coupon rate is equal to the bondholder's required return, the bond's intrinsic value wil equal its par value, and the bond will trade at par . When the bond's coupon rate is greater than the bondholder's required return, the band's intrinsic value will its par value, and the band will trede 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 band will trade at a discount For example, assume Oliver wants to earn a return of 10.50% and is offered the opportunity to purchase a $1,000 par value bond that pays a 8.75" 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 + + CH Complete the following table by identifying the appropriate corresponding variables used in the equation. Unknown Variable Name Bond's semiannual coupon payment Variable Value 565.63 $1,000 B Semiannual required return Based on this equation and the data, it is reasonable to expect that Oliver's potential bond investment is currently sitting an intrinske value less than $1,000 Now, consider the situation in which Oliver wants to earn a return of 6.75%, but the bond being considered for purchase offers a coupon rate of 8.75%. 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 $1,265 v (rounded to the nearest whole dollar) s_less than its par value, so that the bond is trading at a discount Given your computation and conclusions, which of the following statements is true? When the coupon rate is greater than Oliver's required return, the bond's intrinsic value will be less than its par value. Based on this equation and the data, it is reasonable value less than $1,000. to expect that Oliver's potential bond investment is currently exhibiting an intrinske Now, consider the situation in which Oliver wants to earn a return of 6.75%, but the bond being considered for purchase offers a coupon rate of 6 8.75%. 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 $1,265 (rounded to the nearest whole dollar) is_less than its par value, so that the bond is trading at a discount Given your computation and conclusions, which of the following statements is true? When the coupon rate is greater than Oliver's required return, the band's intrinsic value will be less than its par value When the coupon rate is greater than Oliver's required return, the bond should trade at a discount When the coupon rate is greater than Oliver's required return, the bond should trade at a premium. A bond should trade at a par when the coupon rate is greater than Oliver's required return