A bond with a par value of $1,000 has a 6% coupon rate with semi-annual coupon...

A bond with a par value of $1,000 has a 6% coupon rate with semi-annual coupon payments made on July 1 and January 1. If the bond changes hands on November 1, which of the following is true with respect to accrued interest?

The buyer will pay the seller $20 of accrued interest

The seller will pay the buyer $20 of accrued interest

The buyer will pay the seller $10 of accrued interest

The seller will pay the buyer $10 of accrued interest

None of the above

Solutions

Expert Solution

A is correct.

Semi-annual coupon = 6% x 1000 / 2 = 30 every six months.

Period between July and November = 4 months. Hence, accrued interest = 30 / 6 x 4 = $20

As the seller has held the bond till November, the buyer has to pay the accrued interest to the seller.

jeff jeffy answered 1 year ago

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