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Calculating the Intrinsic Value of a Bond

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Twin Oaks Health Center has a bond issue outstanding with a coupon rate of 7 percent and four years remaining until maturity. The par value of the bond is $1,000, and the bond pays interest annually.

a. Determine the current value of the bond if present market conditions justify a 14 percent required rate of return.

b. Now, suppose Twin Oaks' four-year bond had semiannual coupon payments. What would be its current value? (Assume a 7 percent semiannual required rate of return. However, the actual rate would be slightly less than 7 percent because a semiannual bond is slightly less risky than an annual coupon bond.)

c. Assume that Twin Oaks' bond had a semiannual coupon but 20 years remaining to maturity. What is the current value under these conditions? (Again, assume a 7 percent semiannual required rate of return, although the actual rate would probably be greater than 7 percent because of increased price risk.)

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Solution Summary

Solution describes the steps to find intrinsic value of a bond in different conditions with the help of formulas in MS Excel.

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Please refer attached file for better understanding of formulas.

a. Determine the current value of the bond if present market conditions justify a 14 percent required rate of return.

Required rate of return=rate=14%
Number of periods=nper=4
Coupon amount=pmt=1000*7%=$70
Par Value of bond=fv=$1,000
Type of paument=type=0 0 indicate end of period payments
Value of bond = present value of cash inflows=$796.04 (Use PV function ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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