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

Assignment, 1. If Robinson wishes to maximize its total market value, would...

1. If Robinson wishes to maximize its total market value, would you recommend that it issue debt or equity to finance the land purchase? Explain. 2. Construct Robinson’s market va

Explain the term - timing of benefits, Explain the term - Timing of Benefit...

Explain the term - Timing of Benefits A more significant technical objection to profit maximisation, as a guide to financial decision making, is that it ignores the differen

Determine the investment to maximize the return, Assume that the treasurer ...

Assume that the treasurer of a company has an extra cash reserve of $1,000,000 to invest for six months. The six-month interest rate is 8% per year in the U.S. and 6% per year in G

Why is the replacement value of assets method, Why is the replacement value...

Why is the replacement value of assets method not generally used to value complete businesses? The replacement value of assets method isn't often applied to entire business val

Define how do mergers affect small businesses, How do mergers affect small ...

How do mergers affect small businesses? A: As per to a recent study by Federal Reserve and Wharton Financial Institutions Center economists, not a big deal. Their analysis reve

Give subject matter of participation, Q. Give subject matter of participati...

Q. Give subject matter of participation? Subject matter of participation by and large the workers interests in participation varies with the nature of issues' involved in parti

Calculate the standard deviation , The attached file (MFR & FFM Ass Returns...

The attached file (MFR & FFM Ass Returns Data.xls) gives 132 months returns for thirty securities drawn from the FT ALL share index as well as the returns on the FT ALL share index

Define the benefits of the jit inventory control system, What are the benef...

What are the benefits of the JIT inventory control system? The just-in-time that is abbreviated as JIT inventory control system lowers inventory carrying costs and tends to inc

Banking sector securities, The banking sector has a vital and active ...

The banking sector has a vital and active role in the money market. The transactions taking place in these securities are large in size, both in terms of volumes

Tests in investments, Tests in Investments There are many rules that sp...

Tests in Investments There are many rules that specify how the past data of share prices can be used to obtain a clue regarding the future prices of shares. Such rules would be

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