Question

Didlap-Cengage th 12: End-of-Chapter Problems - Investing in Stocks and Bonds Sado Search the Back to Assignment Attempts: Average: 73 9. Chi2 Financial Planning Exercise 10 eBook Chapter 12 Financial Planning Exercise 10 Clean and dirty bond prices You have decided to sell a 4 percent semiannual coupon bond two months after the last coupon payment. The bond is currently selling for $979.00. Answer the following questions about the bond. Assume that the par value of the bond is $1,000. Round your answer to nearest cent. a. What is the clean price of the bond? b. What is the dirty (full) price of the bond? c. Explain how the clean and dirty prices of the bond are relevant to the buyer of the bond. Wide in without

Answer 1

a. Calculation of clean price of the bond

The quoted price of the bond is regarded as the clean price of bond. Since in the given case, the quoted bond price is $979, the clean price of the bond is $979.

b. Calculation of dirty price of the bond

No. of days since last payment should be divided by 360, then the same should be multiplied by semi annual coupon payment to arrive at accrued interest which can be added to bond's clean price to arrive at dirty price.

2 months since last payment = 60 days

60 / 360 * $20 ($1,000 * 4% * 6/12)

Accrued Interest = $3.33

Dirty price = Clean Price + Accrued Interest

                = $979 + $3.33

                = $982.33

c. The clean price of the bond is the quoted price of the bond. The bonds are quoted as percentage of its par value. For example, a bond of $100, is quoted as 98% of its par value of $100, then its clean price will be $98, it will also be the quoted price of the bond. Dirty price on the other hand includes the element of accrued interest in clean price. When an individual investor makes a purchase of the bond, the interest that will be received to him or her will not always be equal to the coupon payment, until it is purchased at the coupon payment date. The interest that is foregone or missed by the investor is added back to the clean price of the bond, which brings the dirty price of bond. Therefore, understanding of both prices can help investor in making a purchase decision effectively.