For example, assume Noah wants to earn a return of $15\mathrm{.}75\%$ and is offered the opportunity to purchase a $$1,000$ par value bond that pays a $13\mathrm{.}50\%$ coupon rate $($distributed semiannually$)$ with three years remaining to maturity. The following formula can be used to compute the bond$$s intrinsic value:

Intrinsic Value

$=$

A$(1+$C$)1+$A$(1+$C$)2+$A$(1+$C$)3+$A$(1+$C$)4+$A$(1+$C$)5+$A$(1+$C$)6+$B$(1+$C$)6$

Complete the following table by identifying the appropriate corresponding variables used in the equation.

Unknown

Variable Name

Variable Value

A Bond$$s semiannual coupon payment $$67\mathrm{.}50$

B Bond$$s par value $$1,000$

C Semiannual required return $7\mathrm{.}8750\%$

Based on this equation and the data, it isunreasonable to expect that Noah$$s potential bond investment is currently exhibiting an intrinsic value greater than $$1,000.$

Now, consider the situation in which Noah wants to earn a return of $11\mathrm{.}50\%,$ but the bond being considered for purchase offers a coupon rate of $13\mathrm{.}50\%.$ Again, assume that the bond pays semiannual interest 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 $.$