Final answer:
To calculate the full price of the annual coupon payment bond, use the formula for present value. The accrued interest is calculated based on the number of days since the last coupon payment. The flat price is the full price minus the accrued interest.
Step-by-step explanation:
To calculate the full price of the annual coupon payment bond, we need to consider the present value of the future cash flows. The bond has a coupon rate of 6%, a face value of $1000, and a discount rate per year of 8%. There is four years and three months until maturity, which is equivalent to 4.25 years.
Using the formula for present value of a bond, the full price of the bond can be calculated as follows:
Full Price = (Coupon Payment / (1 + Discount Rate)^Number of years) + (Face Value / (1 + Discount Rate)^Number of years)
For this bond, the coupon payment is $60 (6% of $1000) and the number of years is 4.25. Substituting these values into the formula, we get:
Full Price = (60 / (1 + 0.08)^4.25) + (1000 / (1 + 0.08)^4.25)
Solving this equation will give us the full price of the bond.
The accrued interest is the interest that has accrued since the last coupon payment date and needs to be paid by the buyer of the bond. To calculate the accrued interest, we need to know the number of days since the last coupon payment date. Assuming a 365-day year, we can calculate the daily interest rate as the annual coupon rate divided by 365. Then, we multiply the daily interest rate by the number of days since the last coupon payment date to get the accrued interest.
The flat price, also known as the clean price, is the full price minus the accrued interest. It represents the price of the bond without considering the accrued interest.