Question

When the required return is equal to the coupon rate, the bond value is▼equal togreater thanless thanthe par value. In contrast in part a above, if the required return is less than the coupon rate, the bond will sell at a▼discountpremium

Answer 1

1) Answer: When the required return is equal to the coupon rate, the bond value is equal to the par value,

2) if the required return is less than the coupon rate the bond will sell at a premium.

Explanation:

1) The reason for this that the required return is the market or investors required rate of return for a particular bond, when the required rate and coupon rate are equal it means that the investor is getting the return he wants in coupon payments, therefore the investor will be willing to buy the bond on par value, as he is getting his required return in the form of coupon payments.

2) When the required return is less than the coupon rate the investor is getting more in coupons than he required from the bond so the bonds price will be higher than par so that the return from the coupons become equal to the required rate of return. Thats why when a bonds required return is less than the coupon it sells on a premium.