Answer (1 of 1): The coupon rate's relationship to the rate of return of a bond is inverted i.e. Beta measures a security's sensitivity to market volatility. Call premium. a discount. 8% b. The price of the bond is 100, meaning that buyers are willing to pay you the full $20,000 for your bond. The minimum rate of return that an investment must provide or must be expected to provide in order to justify its acquisition. face value. coupon rate. See Also: Valuation Methods Arbitrage Pricing Theory Capital Budgeting Methods Discount Rates NPV Internal Rate of Return Method. The prevailing interest rate is the same as the bond's coupon rate. the market interest rate. The mathematics of bond valuation imply a predictable relationship between the bond’s coupon rate, the bondholder’s required return… The rate of return is the expected or desired amount of money a person receives from an investment in a savings account, mutual fund or bond. The yield-to-maturity of a bond with a finite maturity date is a function of all of the following variables except: A) the current price B) the required rate of return on the bond b. The company knows this, so they increase the price of the bond and issue it at a premium. if the coupon rate is lower, the bond is selling at a discount. Required Rate of Return in Investing. Dirty yield. Bonds are usually considered a less risky investment than stocks because bond holders typically have first rights to corporate cash flows in the event of financial distress. The coupon rate of the bond is your actual rate of return, not accounting for inflation or taxes. The rate of return (ROR), sometimes called return on investment (ROI), is the ratio of the yearly income from an investment to the original investment. So coupon has an inverse relationship with required rate of return. Home >> Category >> Finance (MCQ) Questions and answers >> Management Accounting; Q. We highlight what each term means and why … 4. Required Rate of Return. A required rate of return helps you decide if an investment is worth the cost, and an expected rate of return helps you figure out how much you can reasonably expect to make from that investment. When the market’s required rate of return for a particular bond is much less than its coupon rate, the bond is selling at: A. Premium. you have discovered that when the required rate of return on a bond you own fell by 0.50 percent from 9.75 to 9.25 percent, the fair present value rose from $975 to $995. Required return on debt (also called cost of debt) can be estimated by calculating the yield to maturity of the bond or by using the bond-rating approach.. Required Rate of Return. the rate that equates the current price of the bond to its future cash … Rate of return refers to a value that indicates how much return is … B. D. Current yield. The required rate of return is a function of the market’s risk-free rate, plus a risk premium specific to the individual issuer. Market risk premium = Market rate of return – Risk-free rate of return … a. For example, if you have a $1,000 bond with a coupon rate of 4 percent, you'd earn $40 in interest each year. There is an inverse relationship between the bond value and required rate of return i.e. Answer: TRUE. and = net cash flow at time , including the initial value and final value , net of … 37) Dry Seal plans to issue bonds to expand operations. Determine how much interest you earned on the bond during the year by multiplying its face value by its coupon rate. Look at how much the bond was selling for on January 1, the beginning of the year, on a bond … If you spend the $30 you collect twice a year, you get $1,000 back for your bond at the end of 30 years, and your total annual rate of return … These terms are most frequently used when comparing the market price of an asset vs the intrinsic value of that asset to determine if it represents a suitable investment. coupon. The market required rate of return on a bond that is held for its entire life is called A. Premium B. 1. The difference between the coupon rate and the required return of a bond is dependent upon the type of bond. What is a bond?A bond is a financial tool which represents a money loan. This is the rate that is added to an investment to adjust it for the market’s expectation of future inflation. But by changing the price of the bond, you can change the effective return on the bond, known as the yield.For a very basic example, imagine you have a one-year, $1,000 bond with a 5 percent coupon rate; at the end of one year, you … The required rate of return is the minimum return an investor expects to achieve by investing in a project. face value. Figuring Bond Return. Bond value and time: Constant required returns Pecos Manufacturing has just issued a 15-year, 12% coupon interest rate, $1,000-par bond … The bond pays interest annually. Let's say you buy a corporate bond with a coupon rate of 5%. Junk bonds will have the biggest difference between its return and the coupon rate. 6% c. 4% d. 2% e. 0%. The difference between rate of return and interest rate is based on the nature of returns on investments and interest paid on a loan or deposit. The company would issue the $500,000 bond for a selling price of $540,573. d. … The required rate of return on these bonds is currently 10 percent, and interest is paid semiannually. An Inflation Premium . A lower coupon rate means the bond is being sold at a discount, whilst a higher coupon rate means the bond is being sold for more than its face value. A bond's value equals the present value of its cash flows determined at the bond's required rate of return.. The discount rate and the required rate of return represent core concepts in asset valuation. For instance, a $1,000 bond held over three years with a $145 return has a 14.5 percent return, but a 4.83 percent annual return. Example: Suppose you buy a 30-year, $1,000 bond that pays 6 percent on a semiannual basis. The metric can be adjusted for the needs and … There are several different types of yield calculations. 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