Accrued interest calculated when bond traded

The accrued interest calculation for a bond is dependent on the day-count basis specified for the bond in question. We have already seen that when bonds are traded in the market the actual consideration that changes hands is made up of the clean price of the bond together with the accrued that has accumulated on the bond since the last coupon payment these two components make up the dirty price of the bond. When calculating the accrued interest, the market will use the appropriate day-count convention for that bond. A particular market will apply one of five different methods to calculate accrued interest these are ... 

Calculation of the coupon income is the difference between the accrued interest bought in at the time of purchasing the cash market bond subtracted from the accrued interest received when the bond is sold. Market conventions play an important role here, for example How many days between trade and settlement How many days in a month How many days in a year In the United Kingdom the market convention is actual number of days in a month and a 365 days in a year. In Germany the convention is actual number of days in month and 360 days in a year. 

Different markets have different settlement conventions. U.K. gilts, for example, normally setde on T + 1 one business day after the trade date, T. Eurobonds, on the other hand, settle on T + 3- The term value date is sometimes used in place of settlement date, however, the two terms are not strictly synonymous. A setdement date can fall only on a business day a bond traded on a Friday, therefore, will settle on a Monday. A value date, in contrast, can sometimes fall on a non-business day—when accrued interest is being calculated, for example. 

When a bond is traded, accrued interest is calculated from and including the last coupon date up to and excluding the value date, usually the settlement date. Interest does not accrue on bonds whose issuer has defaulted. 

This formula calculates the fair price on a coupon payment date, so there is no accrued interest incorporated into the price. Accrued interest is an accounting convention that treats coupon interest as accruing every day a bond is held this accrued amount is added to the discounted present value of the bond (the clean price) to obtain the market value of the bond, known as the dirty price. The price calculation is made as of the bond s settlement date, the date on which it actually changes hands after being traded. For a new bond issue, the settlement date is the day when the investors take delivery of the bond and the issuer receives payment. The settlement date for a bond traded in the secondary market—the market where bonds are bought and sold after they are first issued—is the day the buyer transfers payment to the seller of the bond and the seller transfers the bond to the buyer. 

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