Mod - 2 - Accrued Interest on Coupon Bearing Securities (ex-date and zero ex-date)

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Question from M2. Sept 96 -

This is FYI only, you can disregard the explanation A since there is
no more ex-date as most of the securities are scripless nowadays. But
explanation B is still valid so do take a look.

8. On 28 October 1995, a 5-year 6.50% coupon bond was traded at
RM100.48. Its interest payment dates falls on 30 April and 31 October.
For a one-lot deal, what is the proceed of the bond?

A. RM5,138,850.54
B. RM5,183,850.54
C. RM5,021,350.54
D. RM5,024,000.00
E. RM5,025,766.30

Explanation A - During the OLD Times

Answer given is C. The reason is because this was in 1996. There was
still the concept ex-date for the interest payment. The transacted
date of 28 Oct was within 7 days of the next coupon date. So the
seller is still entitled to the full interest amount since it takes 7
days for the registrar to lodge the new owner of the security. The
seller have to compensate the buyer with the 3 days of accrued
interest (31-28 Oct). That's why it's minus the clean price proceeds.

Accrued interest = 3 /184 x 6.5 /200 x 5 mio) = RM2,649.46
Clean price proceeds = 100.48 x 5mion = RM5,024,000.00

Net proceeds = 5,024,000 - 2,649.46 = RM 5,021,350.54 (answer C)

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Explanation B - NOWADAYS

In the current environment - the next interest payment immediately
goes to the buyer since there is zero ex-interest days. Hence the
buyer needs to compensate the seller for the 184 - 3 = 181 days of
interest by adding it to the proceeds.

Accrued interest = 181 /184 x 6.5 /200 x 5 mio) = RM159,850.54
Clean price proceeds = 100.48 x 5mion = RM5,024,000.00

Net proceeds = 5,024,000 + 159,850.54 = RM 5,183,850.54 (answer B)


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