Question

You purchase a bond with an invoice price of $1,250. The bond has a coupon rate of 7.0 percent and there are 2 months until the next semi-annual coupon date. What is the clean price of this bond?

Group of answer choices

$1,180.00

$1,273.33

$1,226.67

$1,441.50

$1,320.00

Answer 1

C. $1,226.67

Accrued interest is the coupon payment for the period times the fraction of the period that has passed since the last coupon payment. Since we have a semiannual coupon bond, the coupon payment per six months is one-half of the annual coupon payment. There are two months until the next coupon payment, so four month has passed since the last coupon payment. The accrued interest for the bond is:

Accrued interest = $70/2 × 4/6

Accrued interest = $23.33

Clean price = Dirty price – Accrued interest

Clean price = $1,250 – $23.33

Clean price = $1,226.67