A coupon bond that pays interest semi-annually has a par value of $1,000, matures in seven years, and has a yield to maturity of 11%.The intrinsic value of the bond today will be __________ if the coupon rate is 8.8%.

Question

Quizplus · Accepted Answer

To calculate the intrinsic value of the bond, we need to find the present value of all future cash flows (semi-annual interest payments and the principal repayment at maturity) discounted at the yield to maturity (YTM) of 11%.

Using a financial calculator, the present value of each semi-annual coupon payment of $44 ($1,000 x 8.8% / 2) for 14 periods (7 years x 2 semi-annual periods) at a discount rate of 5.5% (11% / 2) is $594.64.

The present value of the principal repayment of $1,000 at maturity is $413.87.

Therefore, the intrinsic value of the bond today is the sum of the present values of all future cash flows, which is:
Intrinsic value = $594.64 x 14 + $413.87 = $8,434.93

Hence, the answer is: 
B) $894.51

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