A coupon bond that pays interest annually has a par value of $1,000, matures in eight years, and has a yield to maturity of 9%. The intrinsic value of the bond today will be ______ if the coupon rate is 6%.

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 coupon rate of 6% on a $1,000 par value, the annual coupon payment is $60. The yield to maturity (YTM) is 9%. Using the present value formula for an annuity (for the coupon payments) and the present value formula for a single sum (for the par value at maturity), the intrinsic value of the bond can be calculated. The correct answer, $833.96, reflects the present value of these cash flows discounted at the bond's YTM of 9%.

A Coupon Bond That Pays Interest Annually Has a Par