A coupon bond that pays interest semiannually has a par value of $1,000, matures in 8 years, and has a yield to maturity of 6%. If the coupon rate is 7%, the intrinsic value of the bond today will be .

$1,062.81  

Explanation:

The intrinsic value of the bond today is the present value of semiannual coupons for 8 years(16 semiannual coupons) and the face value of the bond,which is computed below using financial calculator and excel pv function:

Financial calculator:

N=16( number of semiannual coupons in 8 years=8*2)

PMT=35(semiannual coupon=face value*coupon rate*6/12=$1000*7%*6/12=$35)

I/Y=3(semiannual yield=6%*6/12=3%)

FV=1000(face value is $1000)

CPT PV=$1,062.81  

Using excel PV function:

=-pv(rate,nper,pmt,fv)

nper and N above are the same with other variables having the same name

=-pv(3%,16,35,1000)=$1,062.81  

answer; 20% is your answer;

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