Complete the following table by identifying the appropriate corresponding variables used in the equation.
Unknown
A
B
C
Variable Name
Bond's semiannual coupon payment
Bond's par value
Semiannual required return
Based on this equation and the data, it is reasonable
equal to $1,000.
Variable Value
$25.00
$1,000
2.5000%
to expect that Liam's potential bond investment is currently exhibiting an intrinsic value
Now, consider the situation in which Liam wants to earn a return of 8%, but the bond being considered for purchase offers a coupon rate of 5.00%.
Again, assume that the bond pays semiannual interest payments and has three years to maturity. If you round the bond's intrinsic value to the
nearest whole dollar, then its intrinsic value of $1,105 (rounded to the nearest whole dollar) is greater than its par value, so that the bond is
trading at a premium
Given your computation and conclusions, which of the following statements is true?
When the coupon rate is greater than Liam's required return, the bond should trade at a premium.
When the coupon rate is greater than Liam's required return, the bond should trade at a discount.
When the coupon rate is greater than Liam's required return, the bond's intrinsic value will be less than its par value.
A bond should trade at a par when the coupon rate is greater than Liam's required return.