Fill This Form To Receive Instant Help
Fill This Form To Receive Instant Help
Homework answers / question archive / Eastern Corporation has $1,000 par value bonds with 4 years to maturity
Eastern Corporation has $1,000 par value bonds with 4 years to maturity. The bonds pay an 8% coupon rate with semi-annual coupon interest payments. The bond's closing price is quoted at 101.25. If your required rate of return is 9,5%, what would be the bond's Intrinsic value? $1.310 O $1.212 O $951 5701 O $973
C.$951.
working:
The intrinsic value of the bond = [present value of annuity*interest payment] + [present value factor *par value]
here,
present value of annuity = [1-(1+r)^(-n)]/r
here,
r =9.5% =>0.095 *6 months /12 months
=>0.0475.
n=4 years * 2 semi annual period =>8
=:> [1-(1.0475)^(-8)]/0.0475
=>6.52903579.
interest payment:
par value *coupon rate * 6 months / 12 months
=>$1000*8%*6/12
=>$40.
present value factor = 1/(1+r)^n
r=0.0475
n=8
=>1 /(1.0475)^8
=>0.68987077.
par value =$1000.
bond's intrinsic value = [6.52903579 *$40] + [0.68987077*$1000]
=>$951.
