Series 62

Brokerage Office Procedure - Accrued Interest

Most bonds pay interest semi-annually, based on their maturity date. An investor who wishes to sell a bond between the interest payment dates will be owed the interest that has become due or that has accrued during their holding period. Investors who purchase the bonds between interest payment dates will receive the full semi-annual interest payment on the bond’s next interest payment date. As a result, the purchaser of the bonds must pay the seller the portion of the interest payment that they earned, known as accrued interest. Most bonds trade with accrued interest also known as “and interest”.

There are only two dates during the month that a bond may pay interest they are the 1st and the 15th of the month. Interest on a new issue of bonds begins to accrue on the dated date. It is no unusual for an investor who purchases a new issue of debt securities to owe accrued interest to the issuer for bonds that are delivered after the dated date.

Semi-annual interest payments may be made on the 1st or 15th of the following months:

January & July

February & August

March & September

April & October

May & November

June & December

Calculating Accrued interest

Interest on all bonds accrues from the last interest payment date up to, but not including, the settlement date. Accrued interest calculations for corporate and municipal securities use a 360-day year in which all months contain 30 days. To determine the amount of accrued interest due or owed use the following formula:

Principal X Rate X Time

(Principal X Interest Rate) X (Number of days / 360) = Accrued interest

Example:

An investor purchases 10M XYZ J & J 8% corporate bond on Monday April 1st for regular way settlement. How much accrued interest will the investor owe?

(10,000 x 8%) X (93 /360) =

800 X .2583 = $206.67

To determine the number of days in the above calculation we used 30-day month as follows:

January

30 days

February

30 days

March

30 days

April

3 days

Total

93 days

Note: Interest accrues up to, but not including, settlement date. The trade was done on Monday the first so interest accrued up to Wednesday April 3rd. On Thursday April 4th the trade will settle and the buyer will begin earning their own interest. If the trade had been executed on Friday April 1st the calculation would look like this:

(10,000 x 8%) X (95 /360) =

800 X .2634 = $211.11

Interest continues to accrue on weekends even though weekends are not good settlement dates.

January

30 days

February

30 days

March

30 days

April

5 days

Total

95 days





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