Question

Gumion Inc, bonds have a 18-yeat maturity, a 10% coupon paid semiannualy, and a par value of 51,000 . If your roquired rate of ratum is 13% what is the intrinsic yatue of ine bonis? Pound io twa decimal places (Ex. $000.0)

Answer 1

To determine the intrinsic value of a bond, one must discount the bond's future cash flows, consisting of semiannual coupon payments and par value repayment, at the investor's required rate of return. An illustration is provided using a simple two-year bond's interest payments and final principal repayment discounted at different market rates.

Step-by-step explanation:

The question pertains to the calculation of the intrinsic value of a bond given its coupon rate, maturity, par value, and the investor's required rate of return. To find the intrinsic value of the Gumion Inc. bond, one would discount the future cash flows of the bond, which include semiannual coupon payments and the par value at maturity, back to the present value using the discount rate of 13%. This involves calculating the present value of the annuity represented by the coupon payments and adding it to the present value of the lump-sum payment of the par value at maturity.

For example, if we consider a simple two-year bond with a face value of $3,000 and an coupon rate of 8%, it would pay $240 annually in interest. If the current market discount rate is 8%, then the present value of the bond would be the sum of the discounted interest payments and the discounted principal repayment. A change in the market discount rate to 11% would change this present value, demonstrating the inverse relationship between interest rates and bond prices.