Question

Guntion Inc. bonds have a 18-year maturity, a 9% coupon paid semiannually, and a par value of $1,000. If your required rate of return is 6% what is the intrinsic value of the bond? Round to two decimal places (Ex. $000.00) Gungee Inc. bonds mature in 15 years and pay a coupon of 7% annually. They are currently selling in the market for $1,075. If you buy the bonds today and hold them until maturity, what is your yield to maturity (YTM)?

a) 8.15%
b) 7.00%
c) 6.22%
d) 5.38%

Answer 1

The intrinsic value of the Guntion Inc. bond is approximately $1,560.84. The yield to maturity (YTM) of the Gungee Inc. bond is approximately 6.22%.

Step-by-step explanation:

The intrinsic value of the Guntion Inc. bond can be calculated using the present value of its future cash flows. The bond has a 18-year maturity, a 9% coupon paid semiannually, and a par value of $1,000. Assuming a required rate of return of 6%, we can calculate the present value of the bond as follows:

1. Calculate the total number of semiannual periods: 18 years * 2 periods/year = 36 periods.
2. Calculate the coupon payment per period: $1,000 * 9% * 0.5 = $45.
3. Calculate the present value of the coupon payments: $45 * (1 - (1 + 6%)^-36) / (6%) = $1,049.22.
4. Calculate the present value of the face value payment: $1,000 * (1 + 6%)^-36 = $511.62.
5. Add the present value of the coupon payments and the present value of the face value payment: $1,049.22 + $511.62 = $1,560.84.

Therefore, the intrinsic value of the Guntion Inc. bond is approximately $1,560.84.

To calculate the yield to maturity (YTM) of the Gungee Inc. bond, we need to find the discount rate that equates the sum of its present value of future cash flows to its current market price. The bond has a 15-year maturity, an annual coupon rate of 7%, and is currently selling for $1,075. We can use a financial calculator or software to solve for the YTM, which will be approximately 6.22%. Therefore, the correct answer is option c) 6.22%.