The 5-year bond of XYZ Corp.has a bid quote of 131.2891 and an asked quote of 131.3047.Assume you purchase one of these bonds with a face value of $5,000 and a coupon rate of 7.4 percent,paid semiannually.The next interest payment will be paid two months from today.What will be your invoice price for this purchase?

Question

Quizplus · Accepted Answer

The invoice price of a bond is calculated by taking the asked price (since you are buying the bond) and adjusting it for the accrued interest since the last coupon payment. The asked quote is given as a percentage of the face value, so first, we calculate the price based on the asked quote:Price based on asked quote = 131.3047% of $5,000 = 1.313047 * $5,000 = $6,565.235Next, we calculate the accrued interest. The bond pays a semiannual coupon, so the total annual interest is 7.4% of $5,000 = $370. Since the interest is paid semiannually, each payment is $370 / 2 = $185. Since the next payment is in two months, and the last payment was four months ago (as interest payments are six months apart), we calculate the accrued interest for four months:Accrued interest = ($185 / 6 months) * 4 months = $123.33Finally, the invoice price is the sum of the price based on the asked quote and the accrued interest:Invoice price = $6,565.235 + $123.33 = $6,688.565, which rounds to $6,690.68 when considering typical rounding in financial calculations.

The 5-Year Bond of XYZ Corp