1. Suppose you buy a bond with a 12 percent annual coupon, payable semiannually.
ID: 2741590 • Letter: 1
Question
1. Suppose you buy a bond with a 12 percent annual coupon, payable semiannually. You actually pay $ 1,080 for this bond. On the day you buy it, the next coupon is due in 3 months. What would be the bond's clean price?
a. $1,060
$ 1,080
$1,050
$1,040
2. All else constant, a coupon bond that is selling at a premium, must have:
a coupon rate that is equal to the yield to maturity.
a yield to maturity that is less than the coupon rate.
semiannual interest payments.
a coupon rate that is less than the yield to maturity.
a. $1,060
b.$ 1,080
c.$1,050
d.$1,040
Explanation / Answer
Bond’s price given here is dirty price which includes accrued interest as well .When bond is purchased between coupon dates ,a buyer ends up paying more than the quoted price.
Quoted price does not include the interest component .However ,the price paid includes the accrued interest .
Interest accrued on the given date =3 months/6 months * Semi annual coupon
Interest accrued on the date =3/6 *1000 *12/100 * 6/12=$30
Bond clean price=Bond dirty price-Accrued interest=180-30=50
A bond selling at a premium has a coupon rate more than the market rate and hence it is able to sell at a premium.
Hence, a bond selling at a premium has yield to maturity (b) less than the coupon rate.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.