Question

The bond has a coupon rate of 5.57 percent, it makes semiannual payments, and there are 5 months to the next coupon payment. A clean price of $923 and the par value is $1,000. What is the invoice price?

Multiple Choice

A. $927.64

B. $895.15

C. $918.36

D. $899.79

E. $950.85

Answer 1

Answer: Option A is correct
The formula we need to use to calculate the invoice price is:
Clean price=Dirty price - Accrued Interest
Here, dirty price of the bond refers to the invoice price.
Now, we need to calculate the accrued interest.
Given that, the annual coupon rate is 5.57%. So, semiannual coupon rate is 5.57%/2=0.02785
As there are 5 months remaining for the next coupon date, the accrued interest period is 6-5=1 month, here 6 months refers to semiannual period.
Accrued interest = (Par value)*(Semiannual coupon rate)*(Accrued interest period / Semiannual period)
Given the par value of the bond is $1000.
Accrued interest =$1000*0.02785*(1/6)
=$4.641666667
Clean price of bond = Dirty price (or invoice price) - Accrued Interest.
Invoice price=Clean price of bond+Accrued Interest.
Given that the clean price is $923.
Invoice price=$923+$4.641666667=$927.6416667 or $927.64 (Rounded to two decimal places)