It is March 3, 2020. The quoted price of a U.S. government bond with a 5% per annum coupon (paid semiannually) is 108-15. The bond matures on May 16, 2028. (a) What is the cash price? (b) How does your answer change if it is a corporate bond?
Answers
Answer:
Hello, find the answer in the attached doc
Explanation:
Given :
Coupon rate = 5% (semi annually) and 108 - 15
Matured date = May 16,2028
To find :
a. The cash price ?
b. The answer in case of corporate bond ?
Solution :
The computation is shown below:
a. In 32nd convention, the government bond is quoted in
Price is 108-15 which implies 108 + 15 ÷ 32 = 108.469
Moreover
Cash price = Quoted price + Accrued interest since last coupon date
Days convention is Actual ÷ 365
And,
Accrued interest = Coupon* Days between same day and last coupon date ÷ Days between coupon payments
= (5% ÷ 2) × (108 ÷ 184) = 1.467
Therefore, the Cash price is
= 108.469 + 1.467
= 109.94
And,
b) We know that
Cash price = Quoted price + Accrued interest till last coupon date
Days convention is 30 ÷ 360
So Accrued interest = (5% ÷ 2) × (107 ÷ 180) = 1.486
Hence, Cash price is
= 108.469 + 1.486
= 109.96
Therefore
The cash price is 109.94
in case of Corporate bond , the Cash price is 109.96
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