Question

You purchase a bond with a coupon rate of 9.9 percent and a clean price of $890. Assume a par value of $1,000. If the next semiannual coupon payment is due in two months, what is the invoice price?

Answer 1

Accrued interest is the coupon payment for the period times the fraction of the period that has passed since the last coupon payment. Since we have a semiannual coupon bond, the coupon payment per six months is one-half of the annual coupon payment. There are two months until the next coupon payment, so four months have passed since the last coupon payment. The accrued interest for the bond is:

Accrued interest = $99/2 × 4/6 = $33

Invoice price = Clean price + Accrued interest

Invoice price = $890 + $33

Invoice price = $923