A coupon bond that pays interest annually has a par value of $1,000, matures in six 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

The intrinsic value of a bond can be calculated using the present value of its future cash flows, which include the annual coupon payments and the par value at maturity. Given a coupon rate of 7.5% on a $1,000 par value bond, the annual coupon payment is $75. The bond's yield to maturity is 11%, and it matures in six years. The present value of the bond is calculated as the sum of the present value of the annual coupon payments and the present value of the par value. Using the formula for the present value of an annuity for the coupon payments and the present value formula for a single sum for the par value, the calculation yields an intrinsic value of approximately $851.93.

A Coupon Bond That Pays Interest Annually Has a Par