Accrued Interest
Chapters in this video
- 0:00 The apartment lease analogy and buyer pays seller
- 1:37 Chronological cash flow: why Carla is made whole
- 2:43 30/360 versus actual/actual memory aid
- 4:01 Riley the Rep calculates $15 corporate bond accrued interest
- 5:38 Trading flat: defaulted, income, and zero-coupon bonds
- 6:58 Zero-coupon trap: settlement flat versus OID tax phantom income
- 7:52 Rapid-fire exam recap
What this video covers
- Why the buyer pays accrued interest to the seller at settlement and how the next full coupon payment makes the buyer whole
- How to apply the 30/360 day-count convention to corporate and municipal bonds, and why a six-month period is always 180 days
- How to apply the actual/actual day-count convention to U.S. government bonds using exact calendar days
- Why using the wrong day-count convention produces a plausible wrong answer that the exam writers deliberately place in the choices
- How to calculate accrued interest using the formula: semiannual coupon multiplied by days since last coupon divided by days in period
- Which three bond types trade flat (no accrued interest at settlement): bonds in default, income bonds (adjustment bonds), and zero-coupon bonds
- The critical distinction between zero-coupon bonds trading flat at settlement versus annual original issue discount (OID) tax treatment
Read the full lesson, free
This video's complete written lesson is free to read in the CertFuel app, no signup wall. When you're ready to drill the topic, the full Series 7 course adds adaptive practice questions and spaced-repetition flashcards.
Start on this site: free Series 7 practice questions · Series 7 pass rate