Accrued Interest

Question 1

Most bonds are quoted at a “clean price,” which means ________

Answer 1

The quoted price doesn’t include interest

Question 2

most are traded at a “dirty price,” ____________

Answer 2

Which includes any interest that has accrued on the bond from the date interest was last paid until the day before the settlement date

Question 3

Often, a bond trader will quote the clean price and add the words_______to indicate that whatever interest has accrued will be added to the clean price.

Answer 3

and interest

Question 4

What is the settlement date?

Answer 4

The date that buyers are expected to pay for the securities they purchased and sellers are expected to deliver the securities they sold.

Question 5

What is regular way settlement?

Answer 5

Settlement two business days after trade date/T+2.

Question 6

Where is accrued interest added on buyer’s side?

Answer 6

To the amount of the buyer’s sales confirmation because the buyer must pay the price of the security plus the added interest

Question 7

Where is accrued interest added on seller’s side?

Answer 7

Added to the amount of seller’s confirmation because he receives the price of the security plus the added interest

Question 8

For calculating interest on corporate bonds, each month is assumed to have __days, and a year is assumed to have __days

Answer 8

30,360

Question 9

Is 30 day month and 360 day year assumed for all types of the bonds?

Answer 9

No

Question 10

Sheila has just sold her XYZ 5% bond. The bond last paid interest on February 1st and she sold it on Monday, May 15. How much accrued interest should Sheila receive?

How would you approach the above problem?

Answer 10

First step: Figure out the number of days for accrued interest.
The bond will settle on May 17= T+2 = May 15 +2
Month of Feb - 30 days
Month of Mar- 30 days
Month of April - 30 days
Month of May - 16 days
Total number of days = 106 days

Divide 106/360 = 0.2944

Question 11

Sheila has just sold her XYZ 5% bond. The bond last paid interest on February 1st and she sold it on Monday, May 15. How much accrued interest should Sheila receive?

What would be the second step?

Answer 11

Calculate the amount of annual interest. $10005% = $50
0.2944$50 = $14.71
This is the accrued interest Sheila would receive

Question 12

What is the regular way settlement and day count convention for corporate bonds?

Answer 12

T+2, 30/360

Question 13

What is the regular way settlement and day count convention for MBS, CMO, CDOs?

Answer 13

T+2, 30/360

Question 14

What is the regular way settlement and day count convention for Municipal bonds?

Answer 14

T+2, 30/360

Question 15

What is the regular way settlement and day count convention for Treasury bills?

Answer 15

T+1, Actual/360

Question 16

What is the regular way settlement and day count convention for Treasury Bonds and Notes?

Answer 16

T+1, Actual/Actual

Question 17

Can the coupon rate and par value change for a bond once it starts to trade?

Answer 17

No

Question 18

Interest rates and bond prices have an _____relationship for most bonds, but this relationship does not hold for ____bonds.

Answer 18

Inverse, junk

Question 19

When interest rates fall, _____bonds are likely to be called.

Answer 19

callable

Question 20

When interest rates rise, _____bonds are likely to be redeemed.

Answer 20

Putable