2. The Pennington Corporation issued new bonds 23 years ago. The bonds have a coupon rate of 12 percent, semi-annual payments, and were sold at their par value of $1,000. The 30-year bonds have 7 years remaining to maturity and the level of interest rates has declined. If the required rate of return for this bond is 10 percent, what is the intrinsic value of the bond

c) $1,099

Explanation:

First, the multiple chices for the question

a) $1,692 b) $705 c) $1,099 d) $1,058 e)$1,189

Solution

what are we given,

First the future value = $1000 (which is the par value)

Years left to maturity = 7 yeras

Periods to consider = 2x7 = 14 (since the bonds involve a semi-annual payment)

Coupon rate = 12%

Therefore, we calculate teh interest amount as follows

= Future value x (coupon rate/2) =

$1000 x  (0.12/2)= $60

Step 2: Calculate the Present value Based on given figures

Rate to use for present value = Required rate of return/2 = 10%/2 = 5%

Considering the Present Value

= PV(Rate,nper, pmt, FV)

PV ( 5%, 14, 60, 1000) = $1098.99

PResent Value =  $1098.99

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the answer is "b.the increased supply will create a surplus. "

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