A coupon bond that pays interest semi-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 the bond is calculated by discounting the future cash flows (coupon payments and the par value at maturity) at the yield to maturity rate. With a coupon rate of 12%, the bond pays $60 every six months. Discounting these payments and the par value of $1,000 at a 10% annual yield (5% semi-annually) results in an intrinsic value of approximately $1,077.22.

A Coupon Bond That Pays Interest Semi-Annually Has a Par