Question

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%.

Multiple Choice

• $1,077.20

• $1,075.80

• $922.78

• None of the options

• $924.16

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).

Prima facie, the bond will trade at discount as YTM>coupon rate

Year	Cash flow	PVAF/PVF@5%	Present Value (Cashflow*PVAF/PVF)
1-10	40	7.7217	308.87
10	1000	0.6139	613.91

Current Market Price of Bonds = Cashflow*PVAF/PVF

= 308.87+613.91

= $922.78

Note : Since the bond makes semiannual interest payments, total no. of period is 10(5*2), cashflow per period is 40(1000*8%/2) and cashflows are discounted at 5% (10/2).