Impact of Required Return on Bond Values

When the required return on a bond differs from its coupon rate, the value of a bond would differ from its par/face value. The reason for the differences in the required return and the coupon interest rate may be of change in the basic cost of long-term funds or (ii) change in the basic risk of the firm. When the required return (RR) is more than the coupon rate of interest (CR), the bond value would be less than its par value, that is, the bond would sell at a discount equal to (M - B). Conversely, in case the RR is less than CR, the bond value would be more than the par value, that is, the bond would sell at a premium equal to (B - M).

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