A coupon bond which pays interest annually,has a par value of $1,000,matures in 5 years and has a yield to maturity of 12%.If the coupon rate is 9%,the intrinsic value of the bond today will be approximately _________.

Question

Quizplus · Accepted Answer

The intrinsic value of the bond today can be found using the formula:

Intrinsic value = (C / (1 + r)^1) + (C / (1 + r)^2) + ... + (C + Par Value) / (1 + r)^n

Where,

C = Coupon payment 
r = Yield to maturity 
n = Number of years to maturity

Plugging in the values, we get:

Intrinsic value = (90 / (1 + 0.12)^1) + (90 / (1 + 0.12)^2) + (90 / (1 + 0.12)^3) + (90 / (1 + 0.12)^4) + (1,090 / (1 + 0.12)^5)

Intrinsic value = $892.19

Therefore, the best choice is B as it is closest to the intrinsic value calculated.

A Coupon Bond Which Pays Interest Annually,has a Par Value