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 12%.

Question

Quizplus · Accepted Answer

The intrinsic value of a bond is calculated using the present value of its future cash flows, which include the annual coupon payments and the par value at maturity. With a coupon rate of 12% on a $1,000 par value, the annual coupon payment is $120. The yield to maturity (YTM) is 10%. The present value of the bond is calculated as the sum of the present value of the annual coupon payments for five years plus the present value of the par value. The formula for the present value of an annuity (the coupon payments) and a lump sum (the par value) is used here. The calculation results in an intrinsic value of approximately $1,075.82, indicating that the bond is priced above par due to its coupon rate being higher than the YTM.

A Coupon Bond That Pays Interest Annually Has a Par