Question

Please use the information at the to answer the bottom. The options for the "Now, consider..." paragraph is as follows:

Complete the following table by identifying the appropriate corresponding variables used in the equation. Unknowrn Variable Name Bond's semiannual coupon payment Semiannual required return Variable Value $45.00 $1,000 5.2500% Based on this equation and the data, it isunreasonable to expect that Olivia's potential bond investment is currently exhibiting an intrinsic value greater than $1,000 Now, consider the situation in which Olivia wants to earn a return of 12%, but the bond being considered for purchase offers a coupon rate of 9.00%. 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? O A bond should trade at par when the coupon rate is greater than Olivia's required return. O When the coupon rate is greater than Olivia's required return, the bond should trade at a discount. When the coupon rate is greater than Olivia's required return, the bond should trade at a premium. When the coupon rate is greater than Olivia's required return, the bond's intrinsic value will be less than its par value What will happen to the price of a fixed-rate bond when expectations for inflation rise? The bond price will fall. O The bond price will rise.

1.) its intrinsic value of... ($741, $1,111, $648, $926).

2.) (rounded to the nearest whole dollar) is... (less than, equal to, greater than)

3.) so that the bond is... (trading at par, trading at a discount, trading at a premium)

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Answer 1

Currently Required rate of return is 5.25 whereas coupon rate is 4.5% compounded semiannually. It is underpriced and price will go up tiil maturity.

if required rate of return is 12% and coupon rate is 9% seminannually for 3 years then

(1) Intrinsic value of bond = 45 *PVAF(6%,6) + 1000 PVIF (6%,6)= $929

(2) 929 is less then its par value i.e.$1000

(3).so bond is trading at discount.

So for the first question option 3 because coupon is less then required rate of return and bond Intrinsic value is less then par value.

If inflation rises then bond price will fall due to decrease purchase capacity of same amount.