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Chapter 6

Management and Organizational Studies 3310A Chapter Notes - Chapter 6: Bid Price, Accrued Interest, Clean Price

Management and Organizational Studies
Course Code
MOS 3310A
Bill Dawson

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MOS 3310: Chapter 6- Valuing Bonds Notes
Bonds and the Bond Market
Bonds: Securities that oblige the issuer to make specified payments to the bondholder
Coupon: The interest payment to the bond holder
Face value: Payment at the maturity of the bond. Also called par value or maturity value
Bond market data
Coupon rate: Annual interest payment as a percentage of face value
- To get price information for all traded Canadian Bonds, subscribe to:
- The bond prices reported in newspapers and their web sites are the prices at which bonds
were traded among the dealers and institutional investors
Asked price: what investors need to pau to buy the bond
Bid price: an investor who already owns the bond and wishes to sell it gets this price
- Bond dealers need to charge a spread between the ask and bid price
Bid yield: Bid yield to maturity,
Ask yield: Ask yield to maturity, it measures the rate of return that investors will receive if they
buy the bond at the asked price and hold it to maturity
- When you buy a bond, you pay more than the asked price if you do not happen to buy the
bond on a coupon payment date
- The reason is that the buyer has to compensate the seller for the coupon interest earned
from the last coupon payment to the settlement date, the date when the buyer must pay
the money for the bond
- The settlement date for the bond is typically three days after the bond deal is executed.
This extra payment is called accrued interest and is calculated as:
π΄π‘π‘π‘Ÿπ‘’π‘’π‘‘ π‘–π‘›π‘‘π‘’π‘Ÿπ‘’π‘ π‘‘ = π‘π‘œπ‘’π‘π‘œπ‘› π‘π‘Žπ‘¦π‘šπ‘’π‘›π‘‘ Γ— π‘π‘’π‘šπ‘π‘’π‘Ÿ π‘œπ‘“ π‘‘π‘Žπ‘¦π‘  π‘“π‘Ÿπ‘œπ‘š π‘™π‘Žπ‘ π‘‘
π‘π‘œπ‘’π‘π‘œπ‘› π‘‘π‘œ π‘ π‘’π‘‘π‘‘π‘™π‘šπ‘’π‘›π‘‘ π‘‘π‘Žπ‘‘π‘’
π‘π‘’π‘šπ‘π‘’π‘Ÿ π‘œπ‘“ π‘‘π‘Žπ‘¦π‘  𝑖𝑛 π‘π‘œπ‘’π‘π‘œπ‘›
Accrued interest: Coupon interest earned from the last coupon payment to the purchase date of
the bond
Clean price: Bond price excluding accrued interest
Dirty Price: Bond price including accrued interest
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