Question

On July 10, 2019, you purchase a $10,000 T-note that matures on December 31, 2028 (settlement occurs one day after purchase, so you receive actual ownership of the bond on July 11, 2019). The coupon rate on the T-note is 2.125 percent and the current price quoted on the bond is 98.250 percent. The last coupon payment occurred on June 30, 2019 (11 days before settlement), and the next coupon payment will be paid on December 31, 2019 (173 days from settlement).a. Calculate the accrued interest due to the seller from the buyer at settlement. Calculate the dirty price of this transaction.

Answer 1

The accrued interest at settlement will be $19.23; and the dirty price of the transaction will be $9844.23.  

What is accrued interest?

The interest which is due but not yet received is known as accrued interest. Such interest shall be recorded in the books of accounts as per the accounting standards.

The calculation of accrued interest using given information will be done as,

$\rm Accrued\ Interest= Face\ Value\ x\ [Coupon\ Rate\ x\ \frac{1}{2}]\ x\ [\frac{Days\ before\ Settlement}{Days\ After\ Settlement}]\\\\\rm Accrued\ Interest= 10000\ x\ 0.016025\ x\ 0.12\\\\\rm Accrued\ Interest= \ 19.23$

Similarly, the dirty price will be calculated by adding the current price of $9825 and accrued interest of $19.23 as $9844.23.

Hence, the accrued interest and dirty price have been calculated above.

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