A coupon bond that pays interest annually has a par value of $1,000, matures in five years, and has a yield to maturity of 10%. The intrinsic value of the bond today will be ______ if the coupon rate is 7%.

Question

Quizplus · Accepted Answer

The intrinsic value of a bond is calculated using the present value of its future cash flows, which include the annual coupon payments and the par value at maturity. Given a 7% coupon rate on a $1,000 par value, the annual coupon payment is $70. The present value of these coupon payments and the par value can be calculated using the formula for the present value of an annuity for the coupon payments and the present value of a lump sum for the par value at maturity. Using a 10% yield to maturity, the calculation yields an intrinsic value of approximately $886.28.

A Coupon Bond That Pays Interest Annually Has a Par