Question

How much would an investor expect to pay for a $1,000 par value bond with a 5% p.a. coupon rate (paid semianually) that matures in 5 years and 4 months if the current market interest rate on bonds of this type is 7% p.a. compounded semianually? Calculate the invoice price, the accrued interest and the clean price.

Answer 1

To find the current market price, we need to put the following values in the financial calculator:

INPUT	(5*2)+(4/6)=10.67	7/2=3.5		(5%/2)*1,000=25	1,000
TVM	N	I/Y	PV	PMT	FV
OUTPUT			-912.24

Current Market Price = $912.24

Accrued interest is the coupon payment for the period times the fraction of the period that has passed since the last coupon payment.

Accrued interest = $50 / 2 × 2 / 6 = $25 x0.33 =$8.33

Clean price = Dirty Price - Accrued interest

= $912.24 - $8.33 =$903.91