A coupon bond that pays interest semi-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 8%.

Question

Quizplus · Accepted Answer

The intrinsic value of a bond is calculated using the present value of its future cash flows, which include the semi-annual interest payments and the principal repayment at maturity. Given a coupon rate of 8% on a $1,000 par value bond, the semi-annual interest payment is $40 ($1,000 * 8% / 2). The bond pays this interest every six months for five years (10 periods), and repays the $1,000 at the end of the fifth year. Using a discount rate of 10% annually (or 5% semi-annually), the present value of these cash flows can be calculated, resulting in $922.78.

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