Reading 61: Features of Debt Securities-LOS c 习题精选 buying, 2011, interest, center, price

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Session 15: Fixed Income: Basic Concepts
Reading 61: Features of Debt Securities

LOS c: Define accrued interest, full price, and clean price.

 

 

Austin Traynor is considering buying a $1,000 face value, semi-annual coupon bond with a quoted price of 104.75 and accrued interest since the last coupon of $33.50. If Traynor pays the dirty price, how much will the seller receive at the settlement date?

A) $1,081.00.

B) $1,014.00.

C) $1,047.50.

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The dirty price is equal to the agreed upon, or quoted price, plus interest accrued from the last coupon date. Here, the quoted price is 1,000 × 104.75%, or 1,000 × 1.0475 = 1,047.50. Thus, the dirty price = 1,047.50 + 33.50 = 1,081.00.

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Assume a bond's quoted price is 105.22 and the accrued interest is $3.54. The bond has a par value of $100. What is the bond's clean price?

A) $103.54.

B) $108.76.

C) $105.22.

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The clean price is the bond price without the accrued interest so it is equal to the quoted price.

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A 5% coupon bond with semi-annual coupon payments on a coupon payment date when the coupon has not been paid yet and the bond has a $1,000 par value. What is the accrued interest of the bond and what is the bond's full price?

Accrued Interest

Full Price

A) $25 $1,000

B) $50 $1,050

C) $25 $1,025

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Accrued interest is found by simply dividing the coupon rate by two and then multiplying the result by $1,000. The full price or dirty price of the bond is the price of the bond plus accrued interest, if any.

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If the issuer of a bond is in default, the bond will be trading:

A) flat.

B) on accrual.

C) off the market.

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If an issuer of a bond is in default (i.e., it has not been making periodic contractual coupon payments), the bond is traded without accrued interest and is said to trade flat.

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In the context of bonds, accrued interest:

A) is discounted along with other cash flows to arrive at the dirty, or full price.

B) covers the part of the next coupon payment not earned by seller.

C) equals interest earned from the previous coupon to the sale date.

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This is a correct definition of accrued interest on bonds.

The other choices are false. Accrued interest is not discounted when calculating the price of the bond. The statement, "covers the part of the next coupon payment not earned by seller," should read, "…not earned by buyer."

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Which of the following statements regarding accrued interest on a bond is most accurate?

A) If the buyer must pay the seller the accrued interest, the bond is said to be trading ex-coupon.

B) The bond is trading flat if the bond issuer is in default and the bond is trading without accrued interest.

C) The accrued interest is paid by the seller of the bond to the buyer (new owner) of the bond.

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The accrued interest is paid by the new owner of the bond to the seller of the bond. If the buyer must pay the seller accrued interest, the bond is said to be trading cum-coupon. Otherwise, it is trading ex-coupon.

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The dirty, or full, price of a bond:

A) is paid when a security trades ex-coupon.

B) applies if an issuer has defaulted.

C) equals the present value of all cash flows, plus accrued interest.

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The dirty price of a bond equals the quoted price plus accrued interest.

If an issuer has defaulted, the bond trades without interest and is said to trade flat. When a security trades ex-coupon, the buyer pays the clean price, which is the quoted price without accrued interest.

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Peter Stone is considering buying a $100 face value, semi-annual coupon bond with a quoted price of 105.19. His colleague points out that the bond is trading ex-coupon. Which of the following choices best represents what Stone will pay for the bond?

A) $105.19.

B) $105.19 plus accrued interest.

C) $105.19 minus the coupon payment.

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Since the bond is trading ex-coupon, the buyer will pay the seller the clean price, or the price without accrued interest. So, Stone will pay the quoted price.

The choice $105.19 plus accrued interest represents the dirty price (also known as full price). This bond would be said to trade cum-coupon.