A coupon bond pays semi-annual interest is reported as having an ask price of 117% of its $1,000 par value in the Wall Street Journal.If the last interest payment was made 2 months ago and the coupon rate is 6%,the invoice price of the bond will be _________.

Question

Quizplus · Accepted Answer

Since the bond pays semi-annual interest, the next interest payment is 4 months away (6 months - 2 months since last payment). Therefore, the buyer would have to pay the invoice price, which is the ask price plus the accrued interest since the last payment.

The semi-annual coupon rate is 6%, which means the bond pays $30 in interest every 6 months ($1,000 x 6% / 2). Since the last payment was made 2 months ago, the buyer would have accrued interest of $10 ($30 x 2 / 6).

Therefore, the invoice price of the bond would be $1,180 ($1,000 x 117% + $10), which matches with option C.

A Coupon Bond Pays Semi-Annual Interest Is Reported as Having