LRQ Inc.issued bonds on July 1,2006.The bonds had a coupon rate of 5.5%,with interest paid semiannually.The face value of the bonds is $1,000 and the bonds mature on July 1,2021.What is the intrinsic value of an LRQ Corporation bond on July 1,2012 to an investor with a required return of 7%?

Question

Quizplus · Accepted Answer

The intrinsic value of a bond is calculated by discounting the future cash flows (coupon payments and face value) to the present value using the investor's required return. Here, the bond has 18 remaining periods (9 years x 2), a semiannual coupon payment of $27.50 ($1,000 x 5.5% / 2), and a face value of $1,000. Using a 3.5% semiannual discount rate (7% annual required return / 2), the present value of these cash flows is approximately $901.08.

LRQ IncIssued Bonds on July 1,2006