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

Demand at each particular exchange rate, The usual number of passengers usi...

The usual number of passengers using the service is dependent upon the demand at each particular exchange rate. At 1·52 Euro/£ expected demand = (0·33·)(500 + 460 + 420) = 460

Management information system, Explain the challenges before an E-business ...

Explain the challenges before an E-business management

Liquidity risk, An investor, who wants to sell a bond even before it ...

An investor, who wants to sell a bond even before it reaches its maturity date, would be concerned as to whether he will receive a price that is close to the true

What is affiliated company, Q. What is Affiliated Company? Affiliated C...

Q. What is Affiliated Company? Affiliated Company - Company or other organization related through common ownership,common control of management or owners or through some other

Basic objectives of cash management, Q. Basic objectives of cash management...

Q. Basic objectives of cash management? The basic objectives of cash management are two-fold: 1) To meet the cash disbursement needs (payment schedule); and 2) To minimize f

Show the objectives of inventory management, Q. Show the Objectives of Inve...

Q. Show the Objectives of Inventory Management? Objectives of Inventory Management- The objectives of Inventory Management are: To maintain a adequate large size of inventor

What is acquisition, Acquisition (takeover) or merger A merger is the s...

Acquisition (takeover) or merger A merger is the synergy or combination of two companies which are roughly equal in size by consensus of two organisations. A takeover is where

Explain hard capital rationing and soft capital rationing, Explain Hard cap...

Explain Hard capital rationing and Soft capital rationing The NPV decision rule to admit all projects with a positive net present value requires the existence of a perfect cap

What are the motives of holding cash, Q. What are the Motives of Holding Ca...

Q. What are the Motives of Holding Cash? Motives of Holding Cash: - In every business assets are kept for the reason that they generate profit. But cash is an asset which doesn

Revenue recognition or realisation, Revenue Recognition or Realisation ...

Revenue Recognition or Realisation The resources of business are utilized to earn revenue through sale of goods or rendering of services.The American Accounting Association d

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