Question

You consider buying a semi-annual corporate bond maturing on December 16, 2024 and

settling on August 26, 2020. The bond is based on Actual/365 day-count method with a

coupon rate of 6% redeemable at 100% of par value. The bond yields 7%. Compute the

bond’s price and accrued interest? Solution = PRI = $96.32; AI = $1.16

Answer 1

Calculation of Price of Bond: Price of bond is simply present value of future cashflows of interest and redemtion value.

Price as on Dec 16, 2020 ( Just after interest) = I * PVAF(3.5%, 8) + RV * PVF(3.5%, 8)

= 3 * 6.874+ 100 * 0.7594

= 96.562

Price as on Dec 16, 2020 ( Just before interest) = Price + Interest of 16 Dec

= 96.56 + 3

= 99.562

Price of Bond as on 26 August 2020 = PV of price of 16 Dec 2020

= 99.56/ ( 1 + 0.07*112/365)

= 97.468

Calculation of accrued Interest = FV * I * 71 /365

= 1.167

Calculation of Principal amount = 97.468 - 1.167 = 96.301