Final answer:
To calculate the current intrinsic value of the coupon bond, we need to discount the future cash flows it will generate. The bond pays annual interest of 6.23% on a par value of $1,000 for 10 years and then returns the par value at maturity. By calculating the present value of both the interest payments and the par value using the given yield to maturity of 18.55% per annum, we can determine the current intrinsic value of the bond.
Step-by-step explanation:
To calculate the intrinsic value of the bond, we need to discount the future cash flows that the bond will generate. The bond pays annual interest of 6.23% on a par value of $1,000, so the annual interest payment is $1,000 multiplied by 6.23%, which equals $62.30. This payment will be received for 10 years. Additionally, at the end of the 10 years, the bondholder will receive the par value of $1,000. To calculate the present value of these cash flows, we discount them at the given yield to maturity of 18.55% per annum.
Using a financial calculator or Excel, we can calculate the present value of the interest payments and the present value of the par value at maturity. Adding these present values together will give us the current intrinsic value of the bond. The calculation is as follows:
Present value of interest payments: PV = $62.30 / (1 + 0.1855) + $62.30 / (1 + 0.1855)^2 + ... + $62.30 / (1 + 0.1855)^10
Present value of par value: PV = $1,000 / (1 + 0.1855)^10
The current intrinsic value of the bond is the sum of these present values. By performing the calculations, the current intrinsic value of the bond should be $Answer.