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.
pay, and a bondholder's required return
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 than 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
For example, assume Jackson wants to earn a return of 7.00% and is offered the opportunity to purchase a $1,000 par value bond that pays a 7.00%
coupon rate (distributed semiannually) with three years remaining to maturity. The following formula can be used to compute the bond's intrinsic
value:
