The intrinsic value of an SWH Corporation bond on January 1, 2006, to an investor with a required return of 6% is approximately $890.
The intrinsic value of an SWH Corporation bond can be determined by calculating the present value of its future cash flows. In this case, we need to calculate the present value of the bond on January 1, 2006, with a required return of 6%. Here's how:
Find the present value of the coupon payments: The bond pays semiannual coupons at a rate of 4.5%, so the coupon payment is $45 ($1,000 x 4.5% / 2).
Using a required return of 6%, we can calculate the present value of the coupons using the formula
, where C is the coupon payment, r is the required return, n is the number of coupon periods per year, and t is the number of years until maturity.
In this case, n = 2 (semiannual payments) and t = 10 (years until maturity). Plugging in the values,
we have
= $336.69.
Find the present value of the face value:
The face value of the bond is $1,000. Using the same formula,
,
we have
= $553.68.
Add the present values:
The intrinsic value of the bond is the sum of the present values of the coupon payments and the face value:
$336.69 + $553.68 = $890.37.
Complete Question
SWH Corporation issued bonds on January 1, 2004. The bonds had a coupon rate of 4.5%, with interest paid semiannually. The face value of the bonds is $1,000 and the bonds mature on January 1, 2014. What is the intrinsic Value (to the nearest dollar) of an SWH Corporation bond on January 1 2006 to an investor with a required return of 6% ?