If interest rates decrease to 3% after bonds are issued with a 4% coupon rate, what would happen to the bond's intrinsic value?

When interest rates decrease, the existing bonds with higher coupon rates become more attractive to investors. In this scenario, the bond has a coupon rate of 4%, while the prevailing interest rate has fallen to 3%. Since new bonds would now be issued with lower interest rates, the existing bonds paying 4% would be in higher demand.

The intrinsic value of a bond is closely tied to the present value of its future cash flows, which consist of the coupon payments and the return of the principal at maturity. With lower market interest rates, the present value of the 4% coupon payments increases because these payments are now more favorable compared to the new lower rates. Investors are willing to pay a premium for a bond that pays a higher rate compared to what is available in the market. Therefore, as a result of this demand for higher-yielding bonds, the intrinsic value of the bond is likely to increase.

This phenomenon is a fundamental principle of bond valuation. A decrease in interest rates leads to an increase in the prices (and thus intrinsic value) of previously issued bonds with higher coupon rates.