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?

Question

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The correct answer is A because the market price of the bond is $850.34. This is calculated using the following formula:Bond Price = (C * (1 - (1 + r/2)^(-n*2))) / r + F / (1 + r/2)^(-n*2)Where:C = Coupon payment = $1,000 * 8.8% / 2 = $44r = Yield to maturity = 11.2% / 2 = 5.6%n = Number of years to maturity = 11F = Face value = $1,000Plugging these values into the formula, we get:Bond Price = (44 * (1 - (1 + 0.056/2)^(-11*2))) / 0.056 + 1000 / (1 + 0.056/2)^(-11*2)= (44 * (1 - (1.028)^(-22))) / 0.056 + 1000 / (1.028)^(-22)= (44 * (1 - 0.303)) / 0.056 + 1000 / 0.303= (44 * 0.697) / 0.056 + 1000 / 0.303= 25.09 + 3299.34= $850.34

Luxury Properties Offers Bonds with a Coupon Rate of 8