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Suppose today is Oct 23, 2013. A bond with a 10% coupon paid semiannually every Feb...

Suppose today is Oct 23, 2013. A bond with a 10% coupon paid semiannually every Feb 15 and Aug15 is listed as selling at an ask price of 102.3438. If you buy the bond from a dealer today, what price will you pay for it? The coupon period has 182 days.

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Answer #1

Par value of bond = $1000

Semi-annual Coupon Payment = $1000*10%*1/2

= $50

Semi-annual coupon rate are paid on Feb15 and Aug 15 every year.

Ask price of Bond on Oct 23, 2013 today = 102.3438%

Ask Price in dollar terms = $1000*102.3438% = $1023.438

- Ask price does not includes Accrued Interest while Invoice Price or the Price you pay to Buy Bond includes Accrued Interest.

Accrued Interest earned from Aug 15 to Oct 23 ,i.e., in 69 days = Semi-annual Coupon Payment*69 days/182

= $50*69/182 = $18.9560

Invoice Price = Ask Price + Accrued Interest

= $1023.438 + $18.9560

Invoice price = $1042.3940

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