tejas.gaikwad.1044
Tejas Gaikwad
An accrual bond is a fixed-interest bond that is issued at its face value and repaid at the end of the maturity period together with the accrued interest. In Germany, the accrued interest is compounded. In contrast to zero-coupon bonds, accrual bonds have a clearly stated coupon rate.
A bond that pays no coupons, is sold at a deep discount to its face value, and matures at its face value. An accrual bond has the important advantage of being free from reinvestment risk, though the downside is that there is no opportunity to enjoy the effects of a rise in market interest rates.
An Accrual bond is similar to a zero coupon bond with the only exception that the interest payments are accrued to the principal value and paid at maturity. This type of bond is generally sold at a deep discount and matures at its face value.
The major advantage of such bonds is that the investor doesn’t face the reinvestment risk, on the contrary, he loses the opportunity to gain from favorable market conditions and interest rate changes have a significant impact on this bond. Also, the major disadvantage is phantom income i.e. the investor needs to pay tax even for the interest that he doesn’t get and is accrued to the bond.
How to Calculate Bond Accrued Interest:-
Steps:-
1) Determine the day count fraction (DCF) on your bond by finding how many days in a month are used and how many days in a year are used. For example, 30 days in a month and 360 days in a year would be a DCF of 30/360.
2) Determine the interest rate on your bond (a semi-annual coupon in most cases).
3) Determine the date when the last coupon was paid.
4) Determine how many days have passed since the last coupon-paying day.
5) Divide the number of days that have passed by the number of days in a year for your particular DCF. For example if 20 days have passed since the last coupon-paying day and your year is based on 360 days, the calculation would be 20 divided by 360 (20/360).
6) Multiply the quotient (the answer you get when you divide) by the interest rate on your bond. The answer is the amount of accrued interest for that time period, or a percentage of the total percent for the payout period. For example, 20/360 times 5 percent = 0.0028 or 0.28 percent.
7) Multiply the percent by the face value of your bond to get the dollar value of your accrued interest or coupon payment. For example, if you have a $1,000 bond, the accrued interest calculated would be 0.28 percent times $1,000 or $2.80 for that time period.
A bond that pays no coupons, is sold at a deep discount to its face value, and matures at its face value. An accrual bond has the important advantage of being free from reinvestment risk, though the downside is that there is no opportunity to enjoy the effects of a rise in market interest rates.
An Accrual bond is similar to a zero coupon bond with the only exception that the interest payments are accrued to the principal value and paid at maturity. This type of bond is generally sold at a deep discount and matures at its face value.
The major advantage of such bonds is that the investor doesn’t face the reinvestment risk, on the contrary, he loses the opportunity to gain from favorable market conditions and interest rate changes have a significant impact on this bond. Also, the major disadvantage is phantom income i.e. the investor needs to pay tax even for the interest that he doesn’t get and is accrued to the bond.
How to Calculate Bond Accrued Interest:-
Steps:-
1) Determine the day count fraction (DCF) on your bond by finding how many days in a month are used and how many days in a year are used. For example, 30 days in a month and 360 days in a year would be a DCF of 30/360.
2) Determine the interest rate on your bond (a semi-annual coupon in most cases).
3) Determine the date when the last coupon was paid.
4) Determine how many days have passed since the last coupon-paying day.
5) Divide the number of days that have passed by the number of days in a year for your particular DCF. For example if 20 days have passed since the last coupon-paying day and your year is based on 360 days, the calculation would be 20 divided by 360 (20/360).
6) Multiply the quotient (the answer you get when you divide) by the interest rate on your bond. The answer is the amount of accrued interest for that time period, or a percentage of the total percent for the payout period. For example, 20/360 times 5 percent = 0.0028 or 0.28 percent.
7) Multiply the percent by the face value of your bond to get the dollar value of your accrued interest or coupon payment. For example, if you have a $1,000 bond, the accrued interest calculated would be 0.28 percent times $1,000 or $2.80 for that time period.