Accrued Interest
Chapters in this video
- 0:00 Why accrued interest exists: making the seller whole
- 1:54 Day-count conventions: corporate and municipal use 30/360, government uses actual/actual
- 3:38 Calculating accrued interest: the formula walkthrough
- 4:41 When bonds trade flat: default, income bonds, and zero-coupon
- 5:26 The OID tax trap: settlement flat vs. annual accretion
- 6:10 Rapid-fire exam recap
What this video covers
- Why the buyer compensates the seller for accrued interest at settlement, then recoups it through the next full coupon payment
- The four-step settlement flow: seller earns, buyer pays, buyer receives full coupon, both parties made whole
- Why corporate and municipal bonds use the 30/360 day-count convention, and why government bonds use actual/actual
- How applying the wrong day-count method produces a plausible wrong answer that the exam writers deliberately place as a bait choice
- The accrued interest formula: annual coupon divided by periods per year, multiplied by days since last coupon divided by days in period
- The three bonds that trade flat (no accrued interest): defaulted bonds, income bonds (adjustment bonds), and zero-coupon bonds
- Why zero-coupon bond settlement trades flat even though original issue discount (OID) accretion creates taxable imputed interest annually
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