Bond Valuation: Prices and Yields: practice question
A 6% semiannual-pay bond issued by Corvale Bank pays 3.00 per 100 of par each period and is quoted at a clean price of 98.40. Ninety days have elapsed since the last coupon date, and the current coupon period has 180 days. The full (dirty) price the buyer pays per 100 of par is closest to:
- 98.40
- 99.90
- 101.40
Show answer and explanation
Correct answer: B
Working: Accrued interest = 3.00 × 90/180 = 1.50; dirty price = 98.40 + 1.50 = 99.90
Explanation: The buyer pays the clean price plus accrued interest: 3.00 × 90/180 = 1.50, so the invoice price is 98.40 + 1.50 = 99.90. Paying 98.40 ignores the interest the seller earned between coupon dates, and 101.40 wrongly adds the full 3.00 coupon instead of the 90/180 fraction that has accrued.
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