Answer:
A) $850.33
Explanation:
The value of the bond is the present value(PV) of the future cash receipts expected from the bond. The value is equal to present values of interest payment plus the redemption value (RV).
Value of Bond = PV of interest + PV of RV
The value of bond for Luxury Properties can be worked out as follows:
Step 1
PV of interest payments
Semi annul interest payment
= 8.8% × 1000 × 1/2
= 44
Semi-annual yield = 11.2/2 = 5.6% per six months
Total period to maturity
= (2 × 11) = 22 periods
PV of interest =
44 × (1- (1+0.056^(-22)/0.056)
= 12.47189406
= $548.76
Step 2
PV of Redemption Value
= 1,000 × (1.056)^(-22)
= 301.57
Price of bond
= $548.76 + 301.57
= $850.34
Answer:
A. $850.34
Explanation:
Cr 8.8%, n 11, ytm 11.2% FV %1000
Bond coupon payments are made semi annually
Coupon payments
= 1000*8.8%/2 = $44
n = 11*2 = 22
YTM = 11.2/2 =5.6%
Bond value equals the sum of present value of coupon payments plus the present value of par value maturity
BV = C * [1-(1+r)^-n/r] + FV/(1+r)^n
=44 *[1-(1+0.056)^-22/0.056] +1000/(1+0.056)^22
=548.76+ 301.57
=$850.34
