Question

Moerdyk Corporation's bonds have a 15-year maturity, a 5.25% coupon rate with interest paid semiannually, and a par value of $1,000. The nominal required rate of return on these bonds is 7.25%. What is the bond’s intrinsic value? Enter your answer rounded to two decimal places. Do not enter $ or comma in the answer box. For example, if your answer is $12,300.456 then enter as 12300.46 in the answer box.

Answer 1

Intrinsic Value of the Bond

The Intrinsic Value of the Bond is the Present Value of the Coupon Payments plus the Present Value of the face Value

Face Value of the bond = $1,000

Semi-annual Coupon Amount = $26.25 [$1,000 x 5.25% x ½]

Semi-annual Yield to Maturity = 3.625% [7.25% x ½]

Maturity Period = 30 Years [15 Years x 2]

The Intrinsic Value of the Bond = Present Value of the Coupon Payments + Present Value of the face Value

= $26.25[PVIFA 3.625%, 30 Years] + $1,000[PVIF 3.625%, 30 Years]

= [$26.25 x 18.10736] + [$1,000 x 0.34361]

= $475.32 + $343.61

= $818.93

“Intrinsic Value of the Bond = $818.93”

NOTE

-The formula for calculating the Present Value Annuity Inflow Factor (PVIFA) is [{1 - (1 / (1 + r)ⁿ} / r], where “r” is the Yield to Maturity of the Bond and “n” is the number of maturity periods of the Bond.

-The formula for calculating the Present Value Inflow Factor (PVIF) is [1 / (1 + r)ⁿ], where “r” is the Yield to Maturity of the Bond and “n” is the number of maturity periods of the Bond.