For example, assume Sophia 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: Intrinsic ValueIntrinsic Value = = A(1+C)1+A(1+C)2+A(1+C)3+A(1+C)4+A(1+C)5+A(1+C)6+B(1+C)6A1+C1+A1+C2+A1+C3+A1+C4+A1+C5+A1+C6+B1+C6 Complete the following table by identifying the appropriate corresponding variables used in the equation. Unknown Variable Name Variable Value A Bond’s semiannual coupon payment B Bond’s par value $1,000 C Semiannual required return Now, consider the situation in which Sophia wants to earn a return of 5.00%, but the bond being considered for purchase offers a coupon rate of 7.00%. 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_________ (rounded to the nearest whole dollar)is_______its par value, so that the bond is _______. Given your computation and conclusions, which of the following statements is true? A. When the coupon rate is greater than Sophia’s required return, the bond should trade at a premium. B. A bond should trade at a par when the coupon rate is greater than Sophia’s required return. C. When the coupon rate is greater than Sophia’s required return, the bond should trade at a discount. D. When the coupon rate is greater than Sophia’s required return, the bond’s intrinsic value will be less than its par value.
For example, assume Sophia 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: Intrinsic ValueIntrinsic Value = = A(1+C)1+A(1+C)2+A(1+C)3+A(1+C)4+A(1+C)5+A(1+C)6+B(1+C)6A1+C1+A1+C2+A1+C3+A1+C4+A1+C5+A1+C6+B1+C6 Complete the following table by identifying the appropriate corresponding variables used in the equation. Unknown Variable Name Variable Value A Bond’s semiannual coupon payment B Bond’s par value $1,000 C Semiannual required return Now, consider the situation in which Sophia wants to earn a return of 5.00%, but the bond being considered for purchase offers a coupon rate of 7.00%. 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_________ (rounded to the nearest whole dollar)is_______its par value, so that the bond is _______. Given your computation and conclusions, which of the following statements is true? A. When the coupon rate is greater than Sophia’s required return, the bond should trade at a premium. B. A bond should trade at a par when the coupon rate is greater than Sophia’s required return. C. When the coupon rate is greater than Sophia’s required return, the bond should trade at a discount. D. When the coupon rate is greater than Sophia’s required return, the bond’s intrinsic value will be less than its par value.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
For example, assume Sophia 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:
| Intrinsic ValueIntrinsic Value | = = | A(1+C)1+A(1+C)2+A(1+C)3+A(1+C)4+A(1+C)5+A(1+C)6+B(1+C)6A1+C1+A1+C2+A1+C3+A1+C4+A1+C5+A1+C6+B1+C6 |
Complete the following table by identifying the appropriate corresponding variables used in the equation.
|
Unknown
|
Variable Name
|
Variable Value
|
|---|---|---|
| A | Bond’s semiannual coupon payment | |
| B | Bond’s par value | $1,000 |
| C | Semiannual required return |
Now, consider the situation in which Sophia wants to earn a return of 5.00%, but the bond being considered for purchase offers a coupon rate of 7.00%. 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_________ (rounded to the nearest whole dollar)is_______its par value, so that the bond is _______.
Given your computation and conclusions, which of the following statements is true?
A. When the coupon rate is greater than Sophia’s required return, the bond should trade at a premium.
B. A bond should trade at a par when the coupon rate is greater than Sophia’s required return.
C. When the coupon rate is greater than Sophia’s required return, the bond should trade at a discount.
D. When the coupon rate is greater than Sophia’s required return, the bond’s intrinsic value will be less than its par value.
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