x 4. Bond valuation 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, ies 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 pat value. This also results from the relationship between a bond's coupon rate and a bondholder's required rate of return. A- Remerber, n bond's coupon rate partially determines the interest-based return that a bond pay, and a bondholder's required return reflects the return trata 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 bond'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 equat its par value, and the bond will trade When the band's coupon rate is greater than the bondholder's required return the band's intrinsic value will its par values and the band will trade at a premium . When the band's coupon rate is less than the bondholder's required retum, the band we will be less than its par vate, and the band For example, a son wants to earn return of .com and is offered the oportunity to purch 1.000 par vabond that pays 15.79 Coupon poteributed only with three years and to maturity. The towing form can be used to computer the band's Intrinsie Value 020 + (HO + amplete the following table by identifying the appropriate corresponding variables used in the equation Unknown Variable Name Variable Value $1,000 C Semiannual required retum Based on this equation and the data, it is value greater than $1,000 to expect that Jackson's potential bond investment is currently exhibiting an intrinsic Now, consider the situation in which Jackson wants to earn a return of 2.75%, but the bond being considered for purchase offers a coupon rate of 15.75%. 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 far, then it intrinsic value of crounded to the nearest whole dolar) its par value, so that the bonds Give your computation and conditions, which of the following statements is true? A band should trade star when the counters greater than Jackson required retur When the continger than acon's required return, the bond should trade at a discount 80 900 0001 18 F FE 10 # $ % & Ch 07: Assignment - Bonds and Their Valuation Unknown Variable Name Variable Value A B $1,000 Semiannual required return Based on this equation and the data, it is value greater than $1,000 to expect that Jackson's potential bond investment is currently exhibiting an intrinsic Now, consider the situation in which Jackson wants to earn a return of 13.75%, but the bond being considered for purchase offers a coupon rate of 15.75%. Again, assume that the bond pays semiannual interest payments and has three years to maturity. If you round the bones intrinsic value to the nearest whole dollar, then its intrinsic value of (rounded to the nearest wnole dollar) is its par value, so that the ed bonds Given your computation and conclusions, which of the following statements is true? A bond should trade at a par when the coupon rate is greater than Jackson's required return When the coupon rate is greater than Jackson's required retus, the band should trade at a discount. When the coupon rate is greater than Jackson's required return, the bond intrinsic value will be less than its par value When the coupon rate is greater than Jackson's required return, the bond should trade at a premium