Question

A coupon bond paying semiannual interest is reported as having an ask price of 114% of its $1,000 par value. If the last interest payment was made one month ago and the coupon rate is 7%, what is the invoice price of the bond? Assume that the month has 30 days. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

$1,145.83

Step-by-step explanation:

The invoice price of the bond comprises of ask price and interest accrued for the period of 1 month.

The formula that can be derived for calculating the invoice price is as follows:

Invoice Price = Current Ask Price + Interest Accrued

Ask price is 114% of the par value, then the ask price will be:

= $1,000 × 114%

= $1,140

Interest will be accrued for 1 month only.

The interest for the whole year is:

= $1,000 × 7%

= $70

and for 1 month it would be:

= $70 × 1/12

= $5.83

Based on the above calculations, we get,

Invoice Price = Current Ask price + Interest Accrued

= $1,140 + $5.83

= $1,145.83