A bond will pay $80 in interest at the end of each of the next six years, plus the $1,000 principal at the end of the sixth year. If the required yield-to-maturity is 10%, the intrinsic value is

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The intrinsic value of the bond can be calculated using the present value of an annuity formula for the interest payments and the present value formula for the principal repayment. The interest payments are an annuity of $80 per year for 6 years, and the principal is a single sum of $1,000 paid at the end of 6 years. Both should be discounted back to the present value at the yield-to-maturity rate of 10%.The present value of the annuity (interest payments) is calculated as:$$ PV_{\text{annuity}} = P \times \left( \frac{1 - (1 + r)^{-n}}{r} \right) $$$$ PV_{\text{annuity}} = 80 \times \left( \frac{1 - (1 + 0.10)^{-6}}{0.10} \right) $$$$ PV_{\text{annuity}} \approx 80 \times 4.35526 \approx 348.42 $$The present value of the principal (single sum) is calculated as:$$ PV_{\text{principal}} = F \times (1 + r)^{-n} $$$$ PV_{\text{principal}} = 1000 \times (1 + 0.10)^{-6} $$$$ PV_{\text{principal}} \approx 1000 \times 0.56447 \approx 564.47 $$The intrinsic value of the bond is the sum of these two present values:$$ PV_{\text{total}} = PV_{\text{annuity}} + PV_{\text{principal}} $$$$ PV_{\text{total}} \approx 348.42 + 564.47 \approx 912.89 $$Rounding to the nearest whole number gives an intrinsic value of approximately $913, which corresponds to choice B.

A Bond Will Pay $80 in Interest at the End