Question

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. This also results 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 (might/will)...........pay, and a bondholder’s required return reflects the return that a bondholder(would like/is obligated).............to receive from a given investment.

Answer 1

Remember, a bond’s coupon rate partially determines the interest-based return that a bond WILL pay, and a bondholder’s required return reflects the return that a bondholder WOULD LIKE to receive from a given investment.

Step-by-step explanation:

When a bond is issued, a contract is formed between the issuer and the bondholder. The coupon rate is fixed and it must be paid by the bondholder regardless of the market price of the bond.

On the other hand, the bondholder's expected return is what determines the market price of the bond. if the expected return is higher than the coupon rate, then the bond will be sold at a discount. If the coupon rate is higher than the expected return, then the bond will be sold at a premium.