5) Bond Pricing between coupon dates

Question 1

What is trading ‘cum-coup’?

Answer 1

Bonds traded cum-coupon in most markets and for most days

Question 2

Who does the Cum coupon go to?

Answer 2

The buyer

Question 3

What does the buyer receive and what must they do once they receive it ? (2)

Answer 3

• The buyer receives the next coupon payment.
• The buyer must compensate the seller for any accrued interest.

Question 4

What does the buyer pay?

Answer 4

At purchase the buyer pays → Bond’s clean price + Accrued Interest = Dirty price

Question 5

What is the clean price? (4)

Answer 5

• Clean price: Present Value of cash flows that truly belong to the buyer
• Quoted price, flat price
• Book value of bond for accounting purposes and for calculating capital gains
• Clean price = Dirty price – Accrued interest

Question 6

What is accured interest?

Answer 6

Accrued interest: Interest earned but not yet collected.

Question 7

How is accrued interest calculated?

Answer 7

Question 8

What is the dirty price? (2)

Answer 8

• Dirty price: What the buyer pays (invoice price)
• All-in-price, full price

Question 9

What is the day count convention

Answer 9

SA → Actual/365

Question 10

What is the valuation process? (4)

Answer 10

1) Value the bond as of the next coupon date
2) Discount the value to the current point in time to get the dirty price
3) Calculate the accrued interest
4) Subtract accrued interest to get clean price