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 6.75%. 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

value of the bond = [present value of annuity factor * interest payment] + [present value factor * par value]

here,

present value of annuity factor = [1- (1+r)^(-n)] / r

r = 6.75% per annum =>3.375 % for 6 months =>0.03375

n = 10 years* 2 =>20 semi annual periods.

=>[1-(1.03375)^(-20)] / 0.03375

=>14.3745037.

interest payment =$1,000*5.75%*6/12=>$28.75.

present value factor = 1/ (1+r)^n

=>1/(1.03375)^20

=>0.51486047

face value =$1,000

value of bond =[14.3745037*28.75]+[0.51486047*1000]

=>$928.13