Final answer:
The current value of a bond is determined by discounting its future coupon payments and face value at the market's required rate of return. A bond with a higher coupon rate than the market rate will be worth more than its face value, whereas one with a lower rate will be worth less. The bond's value is calculated by summing the present value of all future payments.
Step-by-step explanation:
The subject of your question is the valuation of a bond in the context of Business or Finance. The valuation of a bond depends on the market's required return relative to the bond's coupon rate, and the process of finding the present value of the bond's future payments is essential to determine its current value.
If three years ago you purchased a bond with a coupon rate of 8% which pays semiannually and there were 9 years left until maturity, the bond would have paid you 4% every six months (half of the annual 8% rate). Now, with market interest rates at 6% for a similar bond, the bond you hold—which offers a higher coupon rate—is more valuable. The current value of the bond is the sum of the present values of all future coupon payments plus the present value of the face value amount that will be received at maturity. We apply a discount rate (which, in this case, is the market's required return of 6%) to each of these future cash flows to determine the present value.