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Big Manufacturer Corporation's bonds have a 10-year maturity, a 5
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 6.50%. 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.
Expert Solution
We can calculate the intrinsic value of bond by using the formula in excel:-
=-pv(rate,nper,pmt,fv)
Here,
PV = Intrinsic value of bond
Rate = 6.50%/2 = 3.25% (semiannual)
Nper = 10*2 = 20 periods (semiannual)
Pmt = Coupon payment = 1000*5.75%/2 = 28.75
FV = 1000
Substituting the values in formula:
=-pv(3.25%,20,28.75,1000)
= 945.48
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