A coupon bond that pays interest annually has a par value of $1,000,matures in 6 years,and has a yield to maturity of 11%.The intrinsic value of the bond today will be ______ if the coupon rate is 7.5%.

Question

Quizplus · Accepted Answer

To calculate the intrinsic value of the bond, we need to use the formula:

Intrinsic value = (C / Y) * [1 - 1 / (1 + Y)^n] + M / (1 + Y)^n

Where: 
C = Annual coupon payment = Par value * Coupon rate = $1,000 * 7.5% = $75 
Y = Yield to maturity = 11% 
n = Number of years until maturity = 6 
M = Par value = $1,000

Plugging in the values:

Intrinsic value = ($75 / 11%) * [1 - 1 / (1 + 11%)^6] + $1,000 / (1 + 11%)^6 
Intrinsic value = $578.63 + $273.30 
Intrinsic value = $851.93

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

A Coupon Bond That Pays Interest Annually Has a Par