Question

You are purchasing a bond with a face value of $1,000 and a coupon rate of 8.85 percent. The bond pays interest semiannually and has a yield to maturity of 7.23 percent. The bond matures in 6.5 years and pays its next interest payment in four months. What amount of accrued interest must you pay to purchase this bond today?

Answer 1

= $14.75

Step-by-step explanation:

The question is to determine the present value of the accrued interest in order to purchase the bond today.

First, accrued interest usually refers to the interest amount receivable on securities such as bonds that accumulates on the principal amount of the bond. It is called accrued because it is yet to be received by the purchaser of the bond.

The formula for accrued interest

= (Face value of the bond x the coupon rate) x the number of months since the payment of the last interest x 12

= ($1,000 x 8.85%) x 2/12

= $14.75