Q14.17

[barbados]

The answer toQ14.17 is as follows:

For example, suppose that a particular bond pays an annual coupon of 6% and goes ex-dividend 10 days before the coupon is due to be paid (and 355 days since the last coupon was paid), at which point it has a quoted (ie clean) price of 98%.

The accrued interest immediately before the bond goes ex-dividend is then equal to: 355/365 x 6 = 5.836.

giving a dirty price of: 98 + 5.836 = 103.586.

Immediately after the bond goes ex-dividend:
• the accrued interest will fall to -10/365 x 6 = -0.164;
• the dirty price of the bond will fall by six to 98 - 0.164 = 97.836;
• the clean price remains unchanged at 98.

My question - if it says the dirty price falls by six, shouldn't the dirty price become 103.586 - 6 = 97.586 (instead of 97.836)?

Thanks.

 

[Colin McKee]

14.17

I think this is a typo. Your post says 98 + 5.836 = 108.586 which is not entirely correct. IN fact it equals 103.836 which then makes it match up with your answer achieved by deducting 6. So its OK once the typo is removed. thanks for pointing it out.