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%, given that the current yield is 5.5%, we need to understand how bond pricing relates to coupon payments, the yield, and the time to maturity.

The intrinsic value of a bond can be calculated using the present value of its future cash flows, which consist of the semiannual coupon payments and the principal repayment at maturity. The present value of these cash flows is discounted at the current market interest rate, which is the yield.

The formula for the intrinsic value of the bond is:

[ PV = \sum_{t=1}^{n} \frac{C}{(1 + r)^t} + \frac{F}{(1 + r)^n} ]

Where:

• (PV) is the present value (or intrinsic value) of the bond.
• (C) is the annual coupon payment.
• (r) is the current yield (market interest rate).
• (n) is the number of periods until maturity.
• (F) is the face value of the bond.

In this case, the bond has a face value (F) of $1,000,