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

Explain the four fundamental rights of ownership, Explain the four fundamen...

Explain the four fundamental rights of ownership A shareholder, by virtue of being an owner, is generally entitled to four fundamental rights of ownership: 1. Claim on a sha

Implementation of the medium term expenditure framework, Question: (a) ...

Question: (a) Show how the Medium Term Expenditure Framework is superior to the traditional one-year presentation of the public sector budget. (b) What are the pre-requisite

Performance budget, Performance budget: it involves evaluation of the perf...

Performance budget: it involves evaluation of the performance of the organization in the context of both overall and specific objectives of the organization. As per the National I

Define the balance of payments, Define the balance of payments. Answer:  ...

Define the balance of payments. Answer:  The balance of payments that is abbreviated as BOP can be defined as the statistical record of a country’s international transactions ove

Accept-reject rule, Accept-Reject Rule: The decision rule is to accept ...

Accept-Reject Rule: The decision rule is to accept the project if the computed payback period is less than the standard.  If not, reject it.  While ranking the projects, projec

Audit opinion, Clean Opinion - AUDIT opinion not qualified for any material...

Clean Opinion - AUDIT opinion not qualified for any material scope restrictions nor departures from GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP). Also called UNQUALIFIED OPINION

What are the reasons for mergers and acquisitions, Reasons for mergers an...

Reasons for mergers and acquisitions The key reasons for mergers and acquisitions, is to maximise shareholder wealth otherwise it wouldn’t be worthwhile. R

Define the matching principle of working capital financing, What is the mat...

What is the matching principle of working capital financing?  What are the advantages of following this principle? The matching principle is while short-term financing is employe

Modern approach, Meaning merits nd demerits of modern approch of financial ...

Meaning merits nd demerits of modern approch of financial management

Integration of economic, a) Globalisation refers to the interdependence and...

a) Globalisation refers to the interdependence and integration of economic, social and politic issues (services, goods, people and capital), across the world. For example, consumer

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