Question

A bond pays semi-annual coupons of $110 and is purchased at a price to yield j₂ = 5%. The interest adjustment portion of the fifth coupon payment is $59.23.

What is the interest adjustment portion of the tenth coupon payment?

• A.

  $53.96

• B.

  $57.44

• C.

  $67.01

• D.

  52.56

Answer 1

In this qestion focus is to be placed on 5th installment and price to yield %.

Price to Yield is semiannually, that means the Price to Yield rate for 6 months will be 2.5% (5%*6/12)

Interest portion on 5th Installment is $59.23.

Therefore Interest portion on 10th Installment will be $52.56 {$59.23*(0.975⁵)}. The amount will not be exact but it will be around $52.18 which would be rounded off to near Option D.

0.975 is the result of interest portion for next installment i.e. 1-2..5%=0.975

Hence the answer to the above problem is Option D, i.e. $52.56.