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

How are the members of the board of directors, How are the members of the b...

How are the members of the board of directors of a corporation chosen and to whom do these board members owe their primary allegiance? The Members of a corporation's board of d

Explain capital investment project appraisal, Question: (a) The future ...

Question: (a) The future value (F) of a sum invested now can be calculated using the formula: F = P(1 + r) n Required: (i) Describe each of the other constituents in the

Risk return relationship, RISK RETURN RELATIONSHIP A business operates...

RISK RETURN RELATIONSHIP A business operates in a market environment, which is not within its control. It is exposed to several dangers from the internal with external sources

Calculate the stock price of the company, As the CEO of PG Industries, you ...

As the CEO of PG Industries, you are hired at the pleasure of the Board of Directors, who in turn are elected by the shareholders. You are considering Project A which you are convi

Sovereign bonds, There are two major factors to be considered while a...

There are two major factors to be considered while analyzing sovereign bonds. They are: economic risk and political risk. Economic risk is all about the ability a

International bonds, International bonds are the bonds issued in a country ...

International bonds are the bonds issued in a country by a non-domestic entity. In fact, it is a collective term used for Eurobonds, foreign bonds and global bonds.

Calculate the net income-asset intensity-return on assets, Analyze a Startu...

Analyze a Startup How would you select an organizational form for a business? Think about this question as you read the following scenario. Joe Jones has created a business

Bajaj electronics caselet, how would you judge the potential profit of Baja...

how would you judge the potential profit of Bajaj Electronics on the first year of sales to Booth Plastics and give your views to increase the profit?

Rand corporation, what is the rand corporation five project rank

what is the rand corporation five project rank

Show the benefits of jit, Q. Show the benefits of JIT? Additionally to ...

Q. Show the benefits of JIT? Additionally to a higher price and quicker settlement by its major customer such a JIT agreement offers several benefits to the supplier of goods.

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