What should be the intrinsic value of Henry's 10-year bond with a coupon rate of 4.85% if the current yield is 5.5%?

To determine the intrinsic value of Henry's 10-year bond with a coupon rate of 4.85% and a current yield of 5.5%, we need to apply the formula for valuing a bond, which takes into account the present value of the bond's future cash flows.

The bond pays an annual coupon of $48.50, calculated from the coupon rate (4.85%) applied to the face value of the bond, typically $1,000. Over 10 years, the cash flows consist of these annual coupon payments plus the return of the principal at maturity.

To find the present value of these cash flows, we use the current yield, which represents the discount rate in this scenario. Since the current yield of 5.5% is higher than the coupon rate, the bond will sell at a discount.

The intrinsic value or price of the bond can be calculated using the formula for the present value of an annuity (for the coupon payments) and the present value of a lump sum (for the principal repayment at maturity).

1. Calculate the present value of the coupon payments:

• Using the formula for the present value of an annuity, we discount each of the $48.50 coupons