Question

Big Manufacturer Corporation's bonds have a 10-year maturity, a 5.75% coupon rate with interest paid semiannually, and a par value of $1,000. The nominal required rate of return on these bonds is 7.25%. 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

Yield to maturity= 7.25%/2= 3.6250% per semi-annual period

Coupon rate= 5.75%/2= 2.8750%

Coupon payment= 0.0288*1000= $28.75

The bond’s intrinsic value is calculated by computing the present value.

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

FV= 1,000

N= 20

I/Y= 3.6250

PMT= 28.75

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

The value obtained is 894.6026.

Therefore, the intrinsic value of the bond is 894.60.

In case of any query, kindly comment on the solution.