Example 1

$7 $7 $7 $107
59 days 306 days

126 days 180 days

Nov. 15, 2000 Jan. 13, 2001 Nov. 15, 2001 Nov. 15, 2002 Nov. 15, 2003

P=?

Assume that appropriate discount rate for this bond is 6.75% compounded annually.

a) What is the full price (or dirty price)?

b) What is the accrued interest?
c) What is the clean price (or quoted price)?
d) What is the full price if the discount rate of 6.75% is compounded
semiannually and coupons are still paid annually?

Solutions:
1  7 107 
a) Full Price    7     $101.7273

1.0675 306 / 365
 1.0675 1.0675 2 

59
b) Accrued Interest  7   $1.1315
365

c) Clean Price = Full Price – Accrued Interest = 101.7273 – 1.1315 = $100.5958

Quoted prices are clean prices in the sense that Accrued Interest is not included in the quoted
prices.

1  7 107 
d) Full Price   7     $101.3624
(1  0.0675 306 / 180
2 ) 
 1  2  1  0.0675
0.0675 2
2
4 


Treasury Bills
Treasury bills are quoted using the yield on discount basis or on a money market basis.

 The yield on a discount basis denoted by y d is computed as:

FP B
yd  
F n

Where F is the Face value, P is the price, B is the year basis (365 or 360) and n is the
number of calendar days remaining to maturity

 The yield on a money market basis denoted by y m is computed as:

F P B
ym  
P n

 When you know that the yield is on a discount basis, you can retrieve the T-bill price
using:

 n  yd 
P  F  1  
 B 

 When you know that the yield is on a money market basis, you can retrieve the T-bill
price using:

F
P
 n  ym 
1  
 B 

Example 2

The US T-Bill with maturity 03/28/2002 and a discount yield of 1.64% as of 12/17/2001 has a
price P equal to:

 101 
P  100  1  1.64%    99.5399
 360 