Question

A coupon bond paying semiannual interest is reported as having an ask price of 117% of its $1,000 par value. If the last interest payment was made one month ago and the coupon rate is 6%, what is the invoice price of the bond? Assume that the month has 30 days

Answer 1

$1,195

Step-by-step explanation:

Calculation the invoice price of the bond

Using this formula

Invoice price of the bond =Clean price + Accrued interest

First step is to find the clean price using this formula

Clean price=Bond amount par value×Ask price percentage

Let plug in the formula

Clean price =$1,000×117/100

Clean price=$1,170

Second step is to calculate for the accrued interest.

Since Semiannually means 6 month, and we were told that the last interest payment was made a month ago which mean we have 5 months left. Now let find the accrued interest using this formula

Accrued interest = Number of days in month ×(5months/6months)

Let plug in the formula

Accrued interest=30× (5months/6months)

Accrued interest =30×0.83333

Accrued interest =30×0.83333

Accrued interest =$25

The last step is to calculate for invoice price of the bond using this formula

Invoice price of the bond =Clean price + Accrued interest

Let plug in the formula

Invoice price of the bond=$1,170+$25

Invoice price of the bond=$1,195

Therefore the Invoice price of the bond will be $1,195