Question

1. You are given the following information for a semi-annual coupon payment bond:

• Coupon rate: 2.5%, par value $1,000
• Price quote: 98:14
• Days since last coupon settlement: 73
• Days separating coupon payments 182

1. What is the flat price of the bond?

2. How much is the accrued interest on the bond?

3. What is the full price of the bond?

Answer 1

Since accrued interest on a bond does not change the yield-to-maturity, the flat price is typically quoted to avoid misleading investors on the daily increase in the full price as a result of interest accrued.

a) 98 -14 equates to 98% of par value plus 14/32nd.

The dollar value for a $1000 par value treasury: 98%of 1000 + (14/33)*1000 = 984.375

Flat Price = 984.375

b) Accrued Interest = Coupon Payment for the Period x (Time Held After the Last Coupon Payment / Coupon Period)

Coupon Payment for the Period = (2.5%/2)*1000 = 12.5

Accrued Interest = 12.5 x (73/ 182) = 5.013

c) Full Price = Flat Price + Accred Interest

Full Price = 984.375 + 5.013 = 989.388