Accrued interest, Financial Management

When an investor buys a bond in between coupon payments, he is supposed to compensate the seller with the coupon interest earned on the bond from the last coupon payment date to the settlement date. This amount of interest is called accrued interest, so the buyer pays the seller the agreed price plus the accrued interest. This is known as full price. The price of the bond without the accrued interest is known as clean price.

A bond in which the buyer must pay the seller accrued interest is said to be trading cum-coupon. If the buyer forgoes the next coupon payment, the bond is said to be trading ex-coupon. In the government bond market in India, and in most other bond markets around the world, the buyer has to pay accrued interest to the seller.

Suppose a bond pays interest semi-annually on July 1 and January 1. If a person sells the bond on May 1, he gets no interest for the four months from January 1 to April 30 for which he held the bond, while the buyer would get six months interest on July 1 though he held it only for two months (May 1 to June 30). The interest for the period from the last coupon due date to the date of the sale is known as accrued interest. In the above illustration, if the bond has a face value of Rs.100 and carries a coupon of 12%, then the accrued interest would amount to Rs.100 x 12/100 x 4/12 = Rs.4.

It is often a convention in the bond markets that the buyer pays the accrued interest to the seller in addition to the price. In other words, the actual cash price paid is equal to the quoted price plus the accrued interest. In India, this practice is prevalent in the government bonds market, but not in the corporate bonds market. In the above illustration, if the quoted price is Rs.98 then under this convention, the actual cash price would be Rs.98 + 4 = Rs.102.

Posted Date: 9/8/2012 4:19:22 AM | Location : United States

Related Discussions:- Accrued interest, Assignment Help, Ask Question on Accrued interest, Get Answer, Expert's Help, Accrued interest Discussions

Write discussion on Accrued interest
Your posts are moderated
Related Questions
Q. Show the Analysis of Credit Information? Analysis of Credit Information: - Subsequent to obtaining the desired information from various sources the information is examined t

5 Define risk. Examine the need for assessing the risks in a project.

Inventory T ur nover In the accounting, a measure of the number of times that the average amount of inventory on hand is sold within a given time of period. In the o

Accounting : Many people believe financial management only relates to bookkeeping and the establishment of accounting reports which reflect those transactions in the books.  Whi

Compare and contrast mutual and stockholder-owned savings and loan associations. Some loan and savings associations are owned by stockholders, just as commercial banks and oth

Do you have Textbook solutions for Financial Management Core Concepts Author: Raymond M. Brooks. ISBN 978-0-13-267103-3.

one page paper reviewing "the Morgan Stanley Oil and Gas Report"

Crown Co. is expecting to receive 100,000 British pounds in one year. Crown expects the spot rate of British pound to be $1.49 in a year, so it decides to avoid exchange rate risk

Interpretations of Profitability Ratio's - ROA:       ROA or the Return on Assets ratio is the ratio of net profit to total assets and this ratio indicates whether total assets

The values shown in ordinary annuity tables (either present value or compound value) can be adjusted to the annuity due form by ____ the ordinary annuity interest factor by ____. (