Bonds and Their Valuation Graded Assignment | Read Chapter 7 | Back to Assignment Due Sunday 07.08.18 at 11:45 P Attempts: 9 Keep the Highest: 9/13 3. Bond valuation Aa Aa 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. Remember, a bond's coupon rate partially determines the interest-based return that a bond reflects the return that a bondholder pay, and a bondholder's riquired returrm to receive from a given investment. might The mathematics of bond valuation imply 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 its par . When the band's coupon rate is greater to the bondholder's required return, the bond's intrinsic value will value, and the band will tr ade at 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 For example, assume 14.00% coupon rate (distributed semiannually) with three years remaining Jackson wants to earn a retum of 12.25% and is offered the opportunity to purchase a $1,000 par value bond that pays a to maturity. The following formula can be used to compute the bond's DOLL F9 F10 F11 F12 Prts F5 F6 F7 F8 F1 F2 F3 F4 5 6