2) Exceeds be less than equal 3) a premium a discount par The mathematics of bon

Question

2)

Exceeds

be less than

equal

3)

a premium

a discount

par

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 its par value, and the bond will trade 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 bond will trade at

Explanation / Answer

When bond's coupon rate is greater to the bondholder's required return, the bond's intrinsic value will EXCEEDS its par value, and the bond will trade at a premium.

When 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 A DISCOUNT.

(the rationale is that the required interest rate and bond value are inversely related, i.e., if the required interest rate is greater than coupon rate, the bond value will be less than face value and vice versa).

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