How does equity valuation differ from bond valuation

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 bondholders required rectum, 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 faun that a bond­­­­­­­­­­________ pay, and a bondholder's required return reflects the return that a bondholder_________ to receive from a pen Investment.

The mathematics of bond valuation imply a indictable relationship between the bond's coupon rate, the bondholders required return, the bond's par value, and its intrinsic value. These relationships can be summarized as blows:

• When the bond's coupon rate is equal to the bondholders required return, the bond's intrinsic value will equal its par value, and the bond von trade at par.

• When the bond's coupon rate is greater to the bondholders required return, the bond's intrinsic value will its pm value, and the bond will trade at a premium. • when the bond's coupon rate is less than the bondholders required return, the bond's intrinsic value will be less than its par value, and the bond will trade at

IC! example, assume Olivia wants to earn a reborn of 5.00% and is offered the opportunity to purchase a $1,000 par value bond that pays a 5.00% coupon rate (distributed semiannually) wet three years remaining to maturity. The following formula can be used to compute the bond's intrinsic value: