SIE practice questionhardBonds — Accrued Interest
When a corporate bond is sold between interest payment dates, the buyer pays the seller:
- AThe market price plus accrued interest from the last payment date✓ Correct answer
- BThe market price minus accrued interest
- COnly the market price of the bond
- DThe par value plus the full semiannual coupon
Explanation
Why A — The market price plus accrued interest from the last payment date
Corporate bonds trade 'and interest,' meaning the buyer pays the seller accrued interest from the last coupon payment date to the settlement date. This compensates the seller for holding the bond during that period. The buyer will receive the full next coupon payment, so paying accrued interest ensures fair treatment. Corporate bonds use a 30/360 day count convention.
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