Question-46: How do you calculate number of days, remaining for the next coupon date?

Answer: It depends what convention is followed. In case of UST it is considering the actual days like 365 days in a year. Suppose a bond is purchased from seller with settlement date as 15^th Jul, which has coupon date as 1^st March and 1^st Sept. Hence, in this case days remain would be calculated as below

• 16 Days of Jul (31-15)
• 31 Days in August
• 1 day of September

So total would be 48 days remaining for next coupon. Similarly, if you are going for corporate bond, it consider 30 days in a month and 360 days in a year. So same scenario number of days remaining are

• 15 Days of Jul (30-15)
• 30 Days in August
• 1 day of September

Which comes as 46 days. But at the same time entire year is equal to 360 days.

Question-47: What do you mean by basis in coupon period?

Answer: When you consider the number of days for a bond it is based on either 365 days a year basis or 360 days in a year basis.

Question-48: What is the formula to calculate the bond price, if bond is purchased between coupon days?

Answer: It has below formula

P= c/(1+i)^w + c/(1+i)^(1+w) + c/(1+i)^(2+w)…… c/(1+i)^(n-1+w)+ M/(1+i)^(n-1+w)

Where

n=remaining number of coupons till maturity

p=price of the bond in currency

c=semi-annual coupon rate

M=maturity value

i= required yield/2

Suppose a corporate bond which has remaining days to next coupon =40 days. Then w would be 40/180. Hence, w represent the

w=number of days between settlement and next coupon date/number of days in the coupon period

Question-49: What is dirty price and why it is called dirty price?

Answer: Suppose buyer buy a bond between coupon dates. So the next coupon is going to the buyer and not the seller. However, seller holds the bond for few days after coupon date and that interest portion should go to the seller, but it would not go. Hence, the price which include accrued interest + price is called dirty price. This is also known as full price. Issuer would send the next coupon to the buyer and not the seller.

Question-50: What is accrued interest?

Answer: Because the trade is settled between coupon dates, it means the seller had held the bond for few days and for those many days the interest should go to seller. That interest is called accrued interest and that is calculated based on the following formula.

Accrued Interest= Coupon*(Number of days between settlement days and last coupon date/basis days)

Basis days can be actual 365/2 or 180 days.

Buyer has to compensate the seller for that accrued interest date. Dirty price include the accrued interest in it.