Question

Google Inc issued bonds on January 1, 2006. The bonds had a coupon rate of 6%, with interest paid monthly. The face value of the bonds is $1,000 and the bonds mature on January 1, 2016. What is the intrinsic value of a Google bond on January 1, 2011 to an investor with a required return of 7%?

A) $957.92

B) $978.57

C) $1,000.00

D) $1,104.28

Please show solution.

Answer 1

Step 1:

As bond is to be valued at year 2011 and maturity is in 2016 the total years to mature is 5 years.

.

FV = Face value of Bond = $1000

PMT = Coupon paid monthly = Face value x Coupon rate / Frequency of coupon payment = 1000 x 6% /12 = $5

N = Number of years remaining to maturity x Frequency of coupon payment = 5 x 12 = 60

R = Required rate of return / Frequency of coupon payments = 7%/12 = 0.005833333 or 0.5833%

Present value of bond or Intrinsic value = PV = ?

.

Step 2:

Formula for bond value:

PV = PMT x ((1-((1+R)^-N)) / R) + (FV/(1+R%)^N)

PV = (5 x ((1-(1+(7%/12))^-60)/(7%/12)) + 1000/(1+(7%/12))^60)

PV = 252.50997 + 705.40504

PV = 957.9150054

PV = $957.92

Correct option is A. $957.92