Final answer:
The intrinsic value of an SWH Corporation bond on January 1, 2006, is calculated by discounting the semiannual interest payments and the face value of the bond at the investor's required return of 6%, then summing those present values.
Step-by-step explanation:
The intrinsic value of an SWH Corporation bond on January 1, 2006, for an investor with a required return of 6% can be calculated by finding the present value of future cash flows, which include the semiannual interest payments and the principal repayment at maturity.
An SWH Corporation bond with a face value of $1,000 and a coupon rate of 4.5% pays $45 in interest annually, which is $22.50 semiannually. Since the bonds mature on January 1, 2014, and we are calculating the value as of January 1, 2006, there are 8 years remaining, which equals 16 semiannual periods.
To find the present value of the interest payments and the principal, we use the formula for the present value of an annuity for the interest payments and the formula for the present value of a lump sum for the final principal repayment. The calculations involve discounting at the investor's required return of 6%, which is divided by 2 to account for the semiannual periods. After the present value of the bond's cash flows is determined, we can round to the nearest dollar to find the bond's intrinsic value.