Question

Suppose that today’s date is April 15. A bond with a 10% coupon paid semiannually every January 15 and July 15 is quoted as selling at an ask price of 101.25. If you buy the bond from a dealer today, what price will you pay for it?

Answer 1

To calculate the price you will pay for a bond, you need to consider the present value of the bond's future cash flows. In this case, the bond has a 10% coupon rate, paid semiannually on January 15 and July 15. We need to determine the present value of the coupon payments and the principal repayment.

Step-by-step explanation:

To calculate the price you will pay for a bond, you need to consider the present value of the bond's future cash flows.

In this case, the bond has a 10% coupon rate, paid semiannually on January 15 and July 15. We need to determine the present value of the coupon payments and the principal repayment on these dates for the remaining life of the bond.

Using the bond's yield to maturity as the discount rate, we can calculate the present value of each cash flow and sum them up to find the bond's price.

In this example, since the bond is selling at a premium (ask price > 100), you will pay more than the quoted ask price of 101.25 for the bond.