A coupon bond that pays interest semi-annually has a par value of $1,000,matures in 7 years,and has a yield to maturity of 11%.The intrinsic value of the bond today will be __________ if the coupon rate is 8.8%.

Question

Quizplus · Accepted Answer

To find the intrinsic value of the bond, we need to discount all of the future cash flows (semi-annual coupon payments and the final par value payment) back to present value using the given yield to maturity of 11%. Using a financial calculator or spreadsheet, we can calculate that the semi-annual coupon payment is $44 ($1,000 par value x 8.8% coupon rate / 2 semi-annual periods per year) and there will be 14 total coupon payments (2 per year for 7 years). We can also calculate that the present value of the final par value payment is $508.53. Adding up the present values of all the cash flows, we get an intrinsic value of $894.51. Therefore, the best choice is B.

A Coupon Bond That Pays Interest Semi-Annually Has a Par