Question

In: Finance

On March 31st, 2020, you take delivery of a $100,000 T-bond that matures on October 31st,...

On March 31st, 2020, you take delivery of a $100,000 T-bond that matures on October 31st, 2030. The coupon rate on the T-bond is 4.20% and the current yield to maturity on the bond is 3.80%. The last coupon payment occurred on October 31st, 2019 and the next coupon payment occurs on April 30th, 2020. Calculate the clean and dirty prices of this transaction.

Solutions

Expert Solution

In the given question following information is given:

  1. T-bond amount is $100,000
  2. Coupon rate on T-bond is 4.20% paid semi-annually
  3. Current yield to maturity on bond is 3.80%
  4. Date of maturity is October 31st, 2030

Now let us first understand the meaning of clean and dirty prices. Dirty price of the transaction is the present value of all future cash flows including accrued interest in the near future and clean price of the transaction is the present value of all future cash flows that does not include any accrued interest in the near future. Accrued interest is the interest outstanding to be received from the bond at the coupon rate.

Now, the present values of future cash flows would be calculated using semi-annual yield to maturity rate i.e. 1.90% for 21 semiannual periods from April 30th, 2020 to October 31st, 2030 with semiannual interest of $2,100 calculated as below:

Semiannual interest = Interest * 6/12

Semiannual interest = ($100,000 * 4.20%) * 6/12

Semiannual interest = $4,200 * 6/12

Semiannual interest = $2,100

Statement showing Present Value of Bond

Semi annualy period Particulars Amount (A) Discounted Factor @ 1.90% (B)

Present Value (A * B)
1 Semi annual interest              2,100 0.9814               2,061
2 to 21 Semi annual interest              2,100 16.2025             34,025
21 Maturity amout of Bond          100,000 0.6735             67,350
Total Present Value of Bond          103,436

Hence,

Clean price of the bond will be the present value of bond i.e. $103,436

Dirty price of the bond = Present value of bond + Interest accrued for one month

Dirty price of the bond = $103,436 + ($100,000 * 4.20% * 1/12)

Dirty price of the bond = $103,436 + $350

Dirty price of the bond = $103,786

jeff jeffy answered 4 months ago
Next > < Previous

Related Solutions

A Treasury bond that settles on October 18, 2016, matures on March 30, 2035. The coupon...
A Treasury bond that settles on October 18, 2016, matures on March 30, 2035. The coupon rate is 6.05 percent and the bond has a yield to maturity of 5.50 percent. What are the Macaulay duration and modified duration? Macaulay duration Modified duration
The balance date for this company is 31st March 2020. You are to record the effect...
The balance date for this company is 31st March 2020. You are to record the effect of each transaction on the extended accounting equation using the table on the next page (page 5). Include all balance day adjustments where applicable. The first example illustrates how you would record the answers on the table. Purchased inventory for $55,000. Paid half upon the receipt of the inventory and the remainder on credit. Depreciate the equipment at balance date. Cost of equipment is...
Consider a T-bond maturing in March 2020 with coupon payments on September 1st and March 1st....
Consider a T-bond maturing in March 2020 with coupon payments on September 1st and March 1st. Assume that the bond has $1000 par value, 10% coupon rate, and YTM = 12.5%. The bond is traded on December 13, 2013. What is the Accrued Interest? What is the full price? What is the flat price?
Consider a T-bond maturing in March 2020 with coupon payments on September 1st and March 1st....
Consider a T-bond maturing in March 2020 with coupon payments on September 1st and March 1st. Assume that the bond has $1000 par value, 10% coupon rate, and YTM = 12.5%. The bond is traded on December 13, 2013. What is the Accrued Interest? What is the Full price? What is the flat price?
Consider a T-bond maturing in March 2020 with coupon payments on September 1st and March 1st....
Consider a T-bond maturing in March 2020 with coupon payments on September 1st and March 1st. Assume that the bond has $1000 par value, 10% coupon rate, and YTM = 12.5%. The bond is traded on December 13, 2013. What is the Accrued Interest? What is the full price? What is the flat price?
The Income Statement of Adom Enterprise for the year ended 31st March, 2020 as prepared by...
The Income Statement of Adom Enterprise for the year ended 31st March, 2020 as prepared by an AccountsAssistantindicatedanetprofitofGHS148,080.Though,thecashbookon31st March,2020 showed a balance at bank to be GHS 13,460. Your attention is however drawn to the following: i) Cheques from customers totalling GHS 14,940 which were recorded in the cash book on March 25, 2020 were not credited by the bank until April 2, 2020. ii) Cheques issued on March 13, 2020 totalling GHS 22,260 in favour of suppliers were not...
Company A issues a bond with a $100,000 face value. The bond matures in three years....
Company A issues a bond with a $100,000 face value. The bond matures in three years. The stated interest rate is 9% and the market interest rate is 12%. Interest payments are made every 6 months. Record the journal entry for the issuance of the bond.
On October 5, 2019, you purchase a $11,000 T-note that matures on August 15, 2031 (settlement...
On October 5, 2019, you purchase a $11,000 T-note that matures on August 15, 2031 (settlement occurs two days after purchase, so you receive actual ownership of the bond on October 7, 2019). The coupon rate on the T-note is 4.875 percent and the current price quoted on the bond is 105.75 percent. The last coupon payment occurred on May 15, 2019 (145 days before settlement), and the next coupon payment will be paid on November 15, 2019 (39 days...
On October 5, 2019, you purchase a $10,000 T-note that matures on August 15, 2031 (settlement...
On October 5, 2019, you purchase a $10,000 T-note that matures on August 15, 2031 (settlement occurs two days after purchase, so you receive actual ownership of the bond on October 7, 2019). The coupon rate on the T-note is 4.375 percent and the current price quoted on the bond is 105.250 percent. The last coupon payment occurred on May 15, 2019 (145 days before settlement), and the next coupon payment will be paid on November 15, 2019 (39 days...
Problem 4.3 part 2 On October 5, 2015, you purchase a $10,000 T-note that matures on...
Problem 4.3 part 2 On October 5, 2015, you purchase a $10,000 T-note that matures on August 15, 2027. (Settlement occurs two dayws after purchase, so you receive actual ownership of the bond on October 7, 2015). The coupon rate on the T-note is 4.375% and the current price quoted on the bond is 105.250%. The last coupon payment occurred on May 15, 2015 (145 days before settlement) and the next coupon payment will be paid on November 15, 2015...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT