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
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).
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