Accrued interest, Financial Management

Assignment Help:

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.


Related Discussions:- Accrued interest

What is estimate of stock, Stock A has settled into a constant dividend gro...

Stock A has settled into a constant dividend growth pattern of 6 percent per year. The current dividend is $1.50, its current price is $15.90. You are an analyst and believe that

Capital budgeting, identify and explain the key stages in the capital inves...

identify and explain the key stages in the capital investment decision-making process and the role of investment appraisal in this processs..

Explain the concept of competitive advantage, There are dissimilar views on...

There are dissimilar views on how an organisation can gain competitive advantage, but contemporary research is placing greater emphasis on the resource-based view. Expl

Award and signing of contract, A w ard of contract In previous sub se...

A w ard of contract In previous sub section you learnt in what situations you can negotiate. Now let us discuss the procedure for awarding the contract. Below are the step

Calculate the cumulative probability , Compound options are usually cheaper...

Compound options are usually cheaper than vanilla options and we know that there are four main types of compound options: a call on a call; a put on a call; a call on a put; a put

Calculate the amount invested in treasury bonds, You have an investment cap...

You have an investment capital of $1,000,000.  You plan to invest a portion of this money in Treasury bonds and the remainder in a stock portfolio.  Treasury bonds are expected to

Explain cross hedging, Explain cross-hedging and discuss the factors determ...

Explain cross-hedging and discuss the factors determining its effectiveness. Answer: Cross-hedging includes hedging a position in one asset by taking a position in another asse

Empirical measurement of liquidity, Empirical Measurement of Liquidity: Th...

Empirical Measurement of Liquidity: The number of days a particular share is being traded reflects the liquidity of the market. If it is traded actively on 50% of the days when th

The us pension fund system, The US Pension Fund System The US corporate...

The US Pension Fund System The US corporate pension system has matured along with the country's demographic cycle. It consists of both defined benefit plans and defined contrib

State a process for benchmarking, State a process for benchmarking 1.  ...

State a process for benchmarking 1.  Gain senior management commitment to establish benchmarking as a process within the organisation and educate stakeholders and staff about t

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd