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Wednesday, June 30, 2010

Buying Bonds - Who Pays the Interest? Part II

In the previous post, we came up with a specific bond offering by Zions Bank.

The bond was $1,410 principal amount of a Bank of America issue maturing in April 1, 2015 with a coupon of 4.50%. We want to see how the interest paid by the buyer is calculated if this bond is bought. This interest is called accrued interest.

To figure the accrued interest, we could do the calculation of multiplying the principal amount (1,410) by the coupon rate (4.50%) by the number of days (see below) divided by 360. The easier way is to use an accrued interest calculator:


The one thing that is tricky for novices is the "days in holding period." Bonds typically pay interest every 6 months. This bond pays on 4/1 and on 10/1. The "days in holding period starts from day of last payment - in this case it would be 4/1. If we were looking at this bond on 11/17, accrued interest would start from 10/1.

The number of days can be calculated by using a calendar or by again using a days between dates calendar.

Have fun calculating accrued interest!

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