Question

For example, assume Sophia wants to earn a return of 12.25% and is offered the opportunity to purchase a $1,000 par value bond that pays a 10.50% coupon rate (distributed semiannually) with three years remaining to maturity. The following formula can be used to compute the bond's intrinsic value: Intrinsic Value = (tot + oto + doto + dom + top + difco + oma Complete the following table by identifying the appropriate corresponding variables used in the equation. Unknown Variable Name Variable Value $1,000 Semiannual required return to expect that Sophia's potential bond investment is currently exhibiting an intrinsic Based on this equation and the data, it is value greater than $1,000. unreasonable Now, consider the situation in which Soph reasonable a return of 8.50%, but the bond being considered for purchase offers a coupon rate of 10.50%. Again, assume that the bond pays semm i mterest payments and has three years to maturity. If you round the bond's intrinsic value to the nearest whole dollar, then its intrinsic value of (rounded to the nearest whole dollar) is its par value, so that the bond is

Answer 1

1.
A is Semiannual interest/coupon payment=1000*10.5%/2=52.5
B is Par value or face value=1000
C is Semiannual required return=12.25%/2=6.125%

2.
Unreasonable

3.
=1000*10.5%/8.5%*(1-1/1.0425^6)+1000/1.0425^6=1051.99740

4.
More than/above

5.
Trading at premium