Question

Six $1000 bonds with 5.4% coupons payable annually are purchased six months after a coupon matures, to yield 2.7% compounded annually. The bonds mature 4 years after the most recent coupon payment.

a. What is the cash price?

b. What is the accrued interest?

c. What is the quoted price?

Answer 1

A. Cash Price of the bond after 4 years will be $1101.09. The formula that has been used in this context is dividing the face value of bond with coupon rate and then multiplying the value with discount rate or the market rate and after that formula of PV has been used.

B. Accrued interest will be 0 is this case. The reason behind this is that value of predicted price of the bond that is dirty price and the value of clean price of the bond is same. Accrued interest formula - F * (r/ PY)) * (E / TP).

Here, C = coupon rate, F = face value, PY = payment year, TP = time between payment and E = day elapsed.

C. Quoted price of the bond will be $1000. The reason behind this is that par value of any bond is generally cosnidered as 100 par value.