2.A bond holders required return reflects the return that a bond holder ( is obl
ID: 2790915 • Letter: 2
Question
2.A bond holders required return reflects the return that a bond holder ( is obligated or would like). 3. ,The bonds intrinsic value will ( exceed, equal, or be less than). 4.the bonds intrinsic value will be less than its par value, and the bond will trade at ( a discount, par, or a premium)Bonds and Their Valuation Graded Assignment | Read Chapter 7 | Back to Assignment Due Saturday 12.02.17 at 11:15 P Attempts Average: 13 1. 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, 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 bond's intrinsic value and its par value. These result from the relationship between a bond's coupon rate and a bondholder's required rate of return pay, and a bondholder's required return Remember, a bond's coupon rate partially determines the interest-based return that a bond reflects the return that a bondholder to receive from a given investment. might will 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 bond's coupon rate is equal to the bondholder's required return, the bond's intrinsic value will equal its par value, and the bond will trade at par When the bond's coupon rate is greater to the bondholder's required return, the bond's intrinsic value will value, and the bond will trade at a premium. its par 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 bond will trade at For example, assume Liam wants to earn a return of 12.00% coupon rate (distributed semiannually) with three years remaining to maturity. The following formula can be used to compute the bond's intrinsic and is offered the opportunity to purchase a $1,000 par value bond that pays a 10.00% value: Intrinsic Value
Explanation / Answer
1. Usually bond holder's must get paid the coupon payment that they are promised but sometimes there might be default in coupon payments if the company gets into financial troubles so the appropriate option will be "might".
2. A bond holders required return reflects the return that a bond holder "would like" to get. Because bond prices tend to fluctuate due to interest rate changes and sometimes there might be default of the coupon payments.
3. When coupon payments are greater than the bondholder's required return, the bond's intrinsic value will exceed its par value and it will trade at a premium.
4. When coupon payments are lesser than the bondholder's required return, the bond's intrinsic value will be less than its par value, and the bond will trade at a discount.
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