Question

Suppose that today’s date is April 15. A bond with a 9% coupon paid semiannually every January 15 and July 15 is quoted as selling at an ask price of 1,012.500. If you buy the bond from a dealer today, what price will you pay for it? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

$1,035

Step-by-step explanation:

For computing the paying price, first we have to determine the quoted price and the accrued interest which is shown below:

Quoted price would be

= Ask price percentage × par value

= 101.25% × $1,000

= $1,012.50

Now the accrued interest would be

= Par value × coupon rate ÷ 2 × (payment months ÷ total months)

= $1,000 × 9% ÷ 2 × (3 months ÷ 6 months)

= $22.50

Now the paying price would be

= $1,012.50 + $22.50

= $1,035

We assume the par value and the ask price percentage and the payment month is calculated from the April 15 to July 15 and total month is calculated from January 15 to July 15