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Youngblood Inc. issued 12% bonds 10 years ago to finance a plant expansion. These bonds mature...

Youngblood Inc. issued 12% bonds 10 years ago to finance a plant expansion. These bonds mature 4 years from today and are priced to yield 8%. Find the intrinsic value of these bonds.

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Answer #1

Bond Valuation: The value of bond is the present value of the expected cashflows from the bond,discounted at Yield to Maturity(YTM).

Year Cash flow PVAF/PVF@8% Present Value (Cashflow*PVAF/PVF)
1-4 120 3.3121* 397.46
4 1000 0.7350** 735.03

Intrinsic Value of Bonds = Cashflow*PVAF/PVF

= 397.46+735.03

= 1132.49

*PVAF = (1-(1+r)^-n)/r

**PVF = 1 / (1+r)^n

Note: It is general practice to take $1,000 as face value when no details are given.

Annual compounding is assumed.

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