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Suppose that today's date is April 15
Suppose that today's date is April 15. A bond with a 10% coupon paid semiannually every Jan 15 and Jul 15 is listed in The Wall Street Journal as selling at an ask price of 101.125 ( quoted as 101.125 at Wall Street Journal). If you buy the bond from a dealer today, What price will you pay for it? (The face value of bond is $1,000.) (This bond use 30/360 day count convention.)
Expert Solution
Quoted Bond price = (Ask price / 100) * Face value
Quoted Bond price = (101.125 / 100) * $1000
Quoted Bond price = $1011.25
Clean price = Quoted Bond price = $1011.25
Coupon per period = (Coupon rate / No of coupon payments per year) * Par value
Coupon per period = (10% / 2) * $1000
Coupon per period = $50
Days between Jan 15 & April 15 = 15(Jan) + 30(Feb) + 30(Mar) + 15(Apr) = 90 days
Days between Jan 15 & Jul 15 = 15(Jan) + 30(Feb) + 30(Mar) + 30(Apr) + 30(May) + 30(Jun) + 15(Jul) = 180 days
Accrued interest = Coupon per period * (Days between Jan 15 & April 15 / Days between Jan 15 & Jul 15)
Accrued interest = $50 * (90 / 180)
Accrued interest = $25
Invoice (Dirty) price = Clean price + Accrued interest
Invoice (Dirty) price = $1011.25 + $25
Invoice (Dirty) price = $1036.25
I will pay $1036.25 for the bond
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