Question

Problem 8-23 Accrued Interest

You purchase a bond with a par value of $1,000, a coupon rate of 7.5 percent, and a clean price of $915.

If the next semiannual coupon payment is due in two months, what is the invoice price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer is NOT 883.75

Answer 1

Hello there,

Let us write down the data given in the above problem:

Face value = $ 1,000

Clean value = $ 915

Coupon rate = 7.5%

Next semi-annual payment due in = 2 months

In the given case, we should determine the value of interst that the bond seller had already earned i.e. 4 months. (6 months - 2 months), which is as follows:

=1,000*7.5%*(4/12)

=$ 25

So the seller had already earned the accrued interest of $25 on bond, so he would like to recover the same from the buyer, because the ultimate receiver of semi-annual interest will be the holder at that time, i.e., the buyer.

Invoice Value of Bond will be:

Clean Value + Accrued interest

=$915 + $25

=$940

Therefore, the invoice value of the bond will be $940