The bonds of Whakatane and Co. are priced for settlement on 15 July 2014 and have the following features.
Par value | $100.00 |
Annual coupon rate | 8% |
Coupon payment frequency | Semiannual |
Coupon payment dates | 15 May and 15 November |
Maturity date | 15 November 2017 |
Day count convention | Actual/Actual |
Annual yield to maturity | 5.5% |
On the basis of this information, the difference between the full and flat prices is closest to:
- 1.333.
- 2.667.
- 0.917.
option a is the answer?
A is correct.
The difference between the full and flat prices is the accrued interest, which is computed as follows. Based on the Actual/Actual day convention, the number of days between the coupon periods is 183 days. Also, using the Actual/Actual day count convention, the number of days between 15 May 2014 and 15 July 2014 is 16 days remaining in May + 30 days in June + 15 days in July = 61 days. Accrued interest (per $100 par value) = (61/183)(8.00/2) = 1.333.
B is incorrect because the accrued interest is computed using the annual coupon payment as Accrued interest (per 100 par value) = (61/183)(8.00) = 2.667.
C is incorrect because the accrued interest is computed using the yield-to-maturity to compute the coupon payment as Accrued interest (per 100 par value) = (61/183)(5.50/2) = 0.917.