Final answer:
a. The annual coupon payment of the bond is $60. b. To calculate the current market price (intrinsic value) of the bond, we need to discount the future cash flows using the present value formula.
Step-by-step explanation:
a. To solve for the annual coupon payment of the bond, we need to determine the coupon rate. The coupon rate can be calculated by dividing the annual coupon payment by the par value of the bond. In this case, the investor expected a yield to maturity of 12% at issuance, so the coupon rate can be calculated as follows:
Coupon Rate = Yield to Maturity / 2
Coupon Rate = 12% / 2 = 6%
The annual coupon payment can be calculated by multiplying the coupon rate by the par value of the bond:
Annual Coupon Payment = Coupon Rate x Par Value
Annual Coupon Payment = 6% x $1,000 = $60
Therefore, the annual coupon payment of the bond is $60.
b. To calculate the current market price (intrinsic value) of the bonds, we need to discount the future cash flows. The future cash flows consist of the annual coupon payments and the principal repayment at maturity. With a current market rate of interest of 9% APR, we can calculate the present value of the bond as follows:
Present Value = (Coupon Payment / Discount Rate) + (Coupon Payment / Discount Rate) + ... + (Coupon Payment / Discount Rate) + (Face Value / Discount Rate)
Where the number of terms is equal to the remaining maturity of the bond. In this case, the bond has 18 years remaining until maturity, so there will be 36 terms (2 terms per year).
Present Value = ($60 / 1.045) + ($60 / 1.045^2) + ... + ($60 / 1.045^36) + ($1,000 / 1.045^36)
Solving this equation will give us the current market price (intrinsic value) of the bonds.