Question

Charlie Brown buys a 19-year bond with a face value of 5000 dollars that is redeemable at par and earns interest at 3.3 percent convertible semiannually. If the yield rate is 6.6 percent convertible semiannually, find the dirty price of the bond 2 months before the payment of the 12th coupon.

Answer 1

Calculation of Current price of Bond after 12th coupon payment= Interest* PVAF for 7 years + Redemption Value* PVF of 7 years

Here interest rate shall be 3.3/2 and yeild also be 6.6/2 as interest due half yearly

=82.5*1/(1.033)^{upto 14years} + 5000*1/(1.033)_¹⁴

= 82.5*11.068+5000*0.635

= $4088.11

This is the Clean Price of Bond so add interest for Dirty Price on 12th coupon payment= $4088.11+82.5= $4170.61

Now we have to discount the dirty price by 2 months rate for the calculation of price 2 months before

= $4170.61*1/1.011

= $4124.75