Luxury Properties offers bonds with a coupon rate of 8.8 percent paid semiannually. The yield to maturity is 11.2 percent and the maturity date is 11 years from today. What is the market price of this bond if the face value is $1,000?

Bond Price is $850.34

Explanation:

Coupon payment = 1000 x 8.8% = $88 / 2 = 44

Number of periods = n = 11 years 2 periods per year = 22 months

Yield to maturity = 11.2% / 2 = 5.6% per six months

Price of bond is the present value of future cash flows, to calculate Price of the bond use following formula:

Price of the Bond = C x [ (1 - (1 + r) ^-n) / r ] + [ F / (1 + r) ^n ]

Price of the Bond = $44 x [ (1 - (1 + 5.6%) ^-22) / 5.6% ] + [ $1,000 / (1 + 5.6%) ^22 ]

Price of the Bond = $44 x [ (1 - (1.056) ^-22) / 0.056 ] + [ $1,000 / (1.056) ^22 ]

Price of the Bond = $548.76 + $301.57

Price of the Bond = $850.34