Question

. Big Manufacturer Corporation's bonds have a 10-year maturity, a 5.25% coupon rate with interest paid semiannually, and a par value of $1,000. The nominal required rate of return on these bonds is 6.75%. What is the bond’s intrinsic value? Enter your answer rounded to two decimal places. Do not enter $ or comma in the answer box. For example, if your answer is $12,300.456 then enter as 12300.46 in the answer box.

Answer 1

Information provided:

Par value= future value= $1,000

Time= 10 years*2= 20 semi-annual periods

Coupon rate= 5.25%/2= 2.6250%

Coupon payment= 0.02625*1,000= $26.25

Yield to maturity= 6.75%/2= 3.3750%

The instrinic value of the bond is calculated by computing the present value.

Enter the below in a financial calculator to compute the present value:

FV= 1,000

PMT= 26.25

I/Y= 3.3750

N= 20

Press the CPT key and PV to compute the present value.

The value obtained is 892.19.

Therefore, the instrinic value  of the bond is 892.19.