A coupon bond that pays interest annually has a par value of $1,000, matures in eight years, and has a yield to maturity of 9%.The intrinsic value of the bond today will be ______ if the coupon rate is 6%.

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 interest payments and the principal amount at maturity. For a bond with a 6% coupon rate, annual interest payments are $60 ($1,000 * 6%). The present value of these payments, plus the present value of the $1,000 par value at maturity, discounted at the yield to maturity of 9%, gives the intrinsic value of the bond. Using the formula for the present value of an annuity and the present value of a single sum, the calculation results in $833.96.

A Coupon Bond That Pays Interest Annually Has a Par