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accrued interest, ST5Q14.13

U

uktous

Member
hi, this question....I got no idea at all...

why do we just take account of the last coupon (ingoring the next couple) before the ex-dividend goes?

why do we just take account of the next coupon (ingoring the last couple) after the ex-dividend goes?

actually, I don't when accrued interest should be a positive item and when accured interest should be a negative item...
 
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Assuming we're talking about coupons rather than couples here... :p

This relates to dirty pricing, where the price of a bond takes account of accrual of interest over the period untill the next coupon payment, starting at a high point immediately after the current coupon and reducing to zero at the next.

However, in practice, there are rules about who receives the actual coupon payment if a trade occurs close to the coupon date. If a trade happens really close to the coupon date, the seller might still receive the coupon even when they don't own the bond at the coupon payment date (has to do with practical implications of where payments are made - there may not be time to change the payee details in a few hours).

I am not sure when the actual cut-off is, but lets say it's 5 days. If A sells a bond to B in the 5 days ex-dividend period, on the coupon payment date A will still receive the coupon. B has therefore purchased the bond without the next coupon ('excluding dividend' or 'ex-dividend').

Assuming 6 monthly coupon payments, accrued interest on coupon payments reduce gradually from day 0 to day '180'. As interest keeps accruing in the ex-dividend period, the dirty price of the bond will reduce. As a result of the 5 day ex-dividend period, the dirty price will equal the clean price 5 days before the next dividend payment period, and continue reducing to a negative difference over the 5 day ex-dividend period. On the coupon date it immediately jumps to include the next 6 months' interest on the coupon period. As a result the movement of the dirty price shows a 5 day negative lag to actual coupon payment dates.
 
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great!

how your answer will be different, if the payments are dividends or ex-dividends, but not coupons from a bond?
 
Similar comments regarding the timing of payments, however the concept of 'clean' and 'dirty' prices doesn't really exist for a traded share (supply and demand factors will have a much bigger impact). Clean prices are much better defined for a bond because of the defined end date whereas shares are treated as an open-ended investment. Share prices should still show a drop at the point they go ex-dividend.
 
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