Basic Accrued Interest Calculation for a Bond

souledge · September 8th, 2014, 3:55 pm

Day Count Convention: ACT/360I purchase a 5% annual pay, $1,000 bond on January 3, 2007 with the next coupon paying on January 3, 2008.What is the accrued interest of the bond on January 2, 2008?

acastaldo · September 8th, 2014, 4:03 pm

50*359/360

tags · September 8th, 2014, 5:59 pm

Finding out an easier question on bonds seems so challenging. Congrats to the author.

souledge · September 8th, 2014, 6:23 pm

Why 359? I can see the intuition behind your result, but Days (D1,D2) = 364 in this case.

acastaldo · September 8th, 2014, 6:38 pm

Sorry, I used 30/360 by mistake. You asked for Act/360. I'll try to read more carefully in the future

souledge · September 8th, 2014, 6:44 pm

What would your answer be for ACT/360?

bearish · September 8th, 2014, 8:35 pm

I'll go out on a limb and suggest 50*364/360.

DavidJN · September 8th, 2014, 10:03 pm

An equally intriguing question is what kind of mindset is required to propose and maintain such an obviously foolish day count convention?In practice, bonds traded within their final coupon period are typically traded as money market instruments. In Canada, where we don't have many foolish fixed income quotation and settlement conventions, one day before it matures I would bid $1,050 discounted one day for same day settlement. Accrued interest is an unnecessary concept with such treatment. It depends on where you live, for starts.

souledge · September 9th, 2014, 6:50 pm

Agreed it depends on where you live.It's also not dependent on a 1 year maturity, just annual coupon payments.This question is the same whether the bond is 1 year to maturity or 100 years to maturity, so in the latter case, you obviously would not bid $1,050 for it. However, the accrued interest calculation is the same.What it boils down to is can the accrued interest ever exceed the coupon payment? Even if it makes no financial sense, is it logically consistent with the day count convention?

souledge · September 9th, 2014, 7:46 pm

I found the answer to my own question.There's no problem of the accrued interest exceeding the coupon payment because the coupon payment is adjusted by the DCF.i.e. Coupon Payment = $1,000 * .05 * 365/360 on non-leap years and $1,000 * .05 * 366/360 on leap years.Thus the answer I was looking for is $50 * 364/360 which someone answered a few posts ago.Thanks everyone.

pakhijain19 · September 23rd, 2014, 7:45 am

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Islacanela · October 7th, 2016, 4:02 pm

Dear all,

is ACT/ACT a separate day count convention? Or it's one of the ACT/ACT ISDA, ACT/ACT ICMA?

Islacanela · October 10th, 2016, 2:10 pm

I've come to the conclusion after some research online that there is ACT/ACT defined by ISDA; and ACT/ACT defined by ICMA . I think I'm right on this. If not, could someone please correct me? Thanks.

fulmerspot · October 24th, 2016, 9:08 am

I've come to the conclusion after some research online that there is ACT/ACT defined by ISDA; and ACT/ACT defined by ICMA . I think I'm right on this. If not, could someone please correct me? Thanks.

Hi - there are differences when the period falls partially in a leap year or when the end date is less than the 28th Feb in the year following a leap year (even if the period is entirely in the year following the leap year), these differences may seem minor but this is one of those things you just have to get right! Once you have got it right you should keep that code and treasure it so you never have to do it again!
Herr Kartoffelkopf aged 52.3867452