Example 24 Computing Accrued Interest with 30360 Day Counts

Compute the accrued interest on an 8 percent corporate bond that settles on June 30. The last coupon date was February 25.

Answer: There are 25 days of accrued interest: 6 days in February; 30 in March, April, and May; and 29 in June. 125/360 = .3472222. The product of .3472222 and \$8 is \$2.77778. Thus, the bond has \$2.77778 of accrued interest per \$100 of face value.

Yields to Maturity and Coupon Yields

The coupon yield of a bond is its annual interest payment divided by its current flat price.29 For example, a bond with a flat price (that is, net of accrued interest) of \$92, which pays coupons amounting to \$10 each year, has a coupon yield of 10/92 = 10.87 percent.

It is easy of show that a straight-coupon bond with a yield to maturity of 10 percent and a price of 100 has a coupon yield of 10 percent on a coupon payment date and vice versa. Try it on a financial calculator. More generally, we have:

Result 2.2 Straight coupon bonds that (1) have flat prices of par (that is, \$100 per \$100 of face value)

and (2) settle on a coupon date, have yields to maturity that equal their coupon yields.

Result 2.2 at first seems rather striking. The yield to maturity is a compound interest rate while the coupon yield is a simple quotient. It appears to be a remarkable coincidence that these two should be the same when the bond trades for \$100 per \$100 of face value, or par. The obviousness of this "coincidence" only will become apparent when you have mastered Chapter 9's material on perpetuities and compounding conventions.

When a bond is trading at par on a coupon date, discounting at the coupon yield is the same as discounting at the yield to maturity. However, coupon yields can give only approximate yields to maturity when a bond is trading at a premium or a discount.

28It is comforting to know that most financial calculators have internal date programs to compute the number of days between two dates using the 30/360 day/count method.

29Whenever the term yield is used alone, it refers to the yield to maturity, not the coupon yield.

Chapter 2 Debt Financing

Retirement Planning For The Golden Years

If mutual funds seem boring to you, there are other higher risk investment opportunities in the form of stocks. I seriously recommend studying the market carefully and completely before making the leap into stock trading but this can be quite the short-term quick profit rush that you are looking for if you am willing to risk your retirement investment for the sake of increasing your net worth. If you do choose to invest in the stock market please take the time to learn the proper procedures, the risks, and the process before diving in. If you have a financial planner and you definitely should then he or she may prove to be an exceptional resource when it comes to the practice of 'playing' the stock market.

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