Question

A United States Treasury bond pays annual interest, has a par value of $1,000, matures in 24 years, has a coupon rate of 1.14% per annum, and has a yield to maturity (YTM) of 11.33% per annum.  The default risk premium on the bond issued by a United States company called Risky Business in the United States is 2.89% per annum. The bond issued by Risky Business pays annual coupon, has a par value of $1,000, matures in 24 years and has a coupon rate of 1.14% per annum. The current intrinsic value of that bond issued by Risky Business is $( ). (Note: answer must be accurate to nearest cent, or 2 decimal places but you may leave your answer with more than 2 decimal places.) [Hint: The default risk premium a bond is the difference between the YTM of a risky bond and the YTM of a default-free bond.]

Answer 1

YTM of Risky Bond = YTM of Risk Free Bond + Default Risk Premium
YTM of Risky Bond = 11.33% + 2.89 %
YTM of Risky Bond =		0.1422
Discounting the Payments of the bond we will get our Intrinsic value of Bond
	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16	17	18	19	20	21	22	23	24
	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7	Year 8	Year 9	Year 10	Year 11	Year 12	Year 13	Year 14	Year 15	Year 16	Year 17	Year 18	Year 19	Year 20	Year 21	Year 22	Year 23	Year 24
Coupons	11.40	11.40	11.40	11.40	11.40	11.40	11.40	11.40	11.40	11.40	11.40	11.40	11.40	11.40	11.40	11.40	11.40	11.40	11.40	11.40	11.40	11.40	11.40	11.40
Principal Payment																								1,000.00
Total	11.40	11.40	11.40	11.40	11.40	11.40	11.40	11.40	11.40	11.40	11.40	11.40	11.40	11.40	11.40	11.40	11.40	11.40	11.40	11.40	11.40	11.40	11.40	1,011.40
PV @ 14.22%	9.98	8.74	7.65	6.70	5.86	5.13	4.49	3.94	3.45	3.02	2.64	2.31	2.02	1.77	1.55	1.36	1.19	1.04	0.91	0.80	0.70	0.61	0.54	41.60
Intrinsic Vlaue of Bond	118.00