A coupon bond that pays interest annually has a par value of $1,000, matures in five years, and has a yield to maturity of 10%.The intrinsic value of the bond today will be ______ if the coupon rate is 7%.

Question

Quizplus · Accepted Answer

The intrinsic value of a bond can be calculated using the present value of its future cash flows, which include the annual coupon payments and the par value at maturity. Given a coupon rate of 7% on a $1,000 par value, the annual coupon payment is $70. The bond's intrinsic value today is the present value of these cash flows discounted at the yield to maturity of 10%. Using the formula for the present value of an annuity for the coupon payments and the present value formula for a single sum for the par value, the calculation is as follows: PV = $70 * [(1 - (1 + 0.10)^-5) / 0.10] + $1,000 * (1 + 0.10)^-5 = $886.28.

A Coupon Bond That Pays Interest Annually Has a Par