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Ulleksa [173]
3 years ago
6

A government bond with a coupon rate of 7% makes semiannual coupon payments on January 15 and July 15 of each year. The Wall Str

eet Journal reports the asked price for the bond on January 30 at $1,001.25. What is the invoice price of the bond? The coupon period has 182 days.
Business
1 answer:
WINSTONCH [101]3 years ago
7 0

Answer:

invoice price (dirty price) = $1,004.13

Explanation:

semi-annual coupon = $1,000 x 7% x 1/2 = $35

clean price = $1,001.25

accrued interest = (Jan. 30 - Jan. 15) x $35 x 1/182 = $2.88

invoice price (dirty price) = clean price + accrued interest = $1,001.25 + $2.88 = $1,004.13

the dirty price or invoice price of a bond includes any accrued interest that the bond may have earned in the period between the last coupon payment and the transaction date.

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If the coupon is higher than the yield, investors should expect the bond's capital value to fall over the remaining term. Therefore, the price of the bond must be higher than its face value. If the bond's coupon rate is lower than its lifetime, the bond's price increases over its remaining lifetime.

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