Question

c) On the 01/09/2008 an investor is purchasing a bond from a seller; the last coupon on the bond was paid on the 01/ 05/2008 and the maturity date is 01/ 05/2012. The bond has a coupon rate of 10% and nominal value K1, 000. The yield to maturity is equal to 8%. (2.5 marks) Determine the dirty price paid by the buyer. i. (2.5 marks) i. Calculate the accrued interest.

Answer 1

Lets first calculate the bond price on the date 01/05/2008 then it is

Full Price of the bond between coupon dates is called dirty price and interest earned between two successive coupopn dates is called Accrued Interest

Price of the bond=1000/(1.08)+1000/(1.08)^2+1000/(1.08)^3+1000/(1.08)^4+10000/(1.08)^4

=K 10662.43

But the seller of the bond has earned the coupon on 01/05/2008 worth 1000 therefore FW of this coupon on 01/09/2008 would be 1000(1.08)^0.33=K 1025.72

This is the accrued interest amount

hence Dirty Price of the Bond is K 10662.43 and Accrued interest that to be deducted from Dirty price is K 1025.72

Dirty Price paid by the buyer is K 10062.43

Accrued Interest is K 1025.72

Clean Price of the same bond=K 10662.43-K 1025.72=K 9636.71