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. These result 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.
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The process of bond valuation is based on the fundamental concept that the current price of a securi...
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