Assume Oliver wants to earn a return of 10.50% and is offered the opportunity to purchase a $1,000 par value bond that pays a 8.75% coupon rate (distributed semiannually) with three years remaining to maturity. The following formula can be used to compute the bond’s intrinsic value:

Intrinsic ValueIntrinsic Value = A/(1+C)^1+A/(1+C)^2+A/(1+C)^3+A/(1+ C)^4+A/(1+C)^5+A/(1+C)^6+B/(1+C)^6< br />
Based on this equation and the data, it is (unreasonable/reasonable) to expect that Oliver’s potential bond investment is currently exhibiting an intrinsic value less than $1,000.
Now, consider the situation in which Oliver wants to earn a return of 11.75%, but the bond being considered for purchase offers a coupon rate of 8.75%. Again, assume that the bond pays semiannual interest payments and has three years to maturity. If you round the bond’s intrinsic value to the nearest whole dollar, then its intrinsic value of (rounded to the nearest whole dollar) is (equal to/greater than/less than) its par value, so that the bond is (trading at premium/par/discount).