Accrued Market Discount

  

The bonds in the oil well driller looked just fine when they were issued by the company right around par value of $1,000 with a 6% coupon. But that earthquake and tsunami didn't mesh well with the angry sperm whale invasion, and when the platform came loose, bad things happened to the bonds. They cratered to $600 and sat there. It was then that you bought them.

The flavor of bond you purchased comes due in six years, and it carries what's called an accrued market discount. Each year, that bond will come closer to owing its full principal, and you as the holder may have to pay the gain as that market discount comes closer to par value. Note that, if the bonds are truly in danger of not paying, then you don't pay tax, and the bond likely sits in the doldrums at some very low price. That delta between what you paid for the bond and its expected eventual principal return value of $1,000 par is the accrued market discount.

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Finance: What is Accrued Interest?42 Views

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Finance allah shmoop What is a crude interest A crude

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interest would be an investment holding in oil Black crude

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texas t remember jed boy Howdy coming Listen to a

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story about a man named about that Alright all good

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but that's not what a crude interest is at all

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while street never sleeps right So even though a given

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bond might pay forty bucks twice a year what happens

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if you buy the bond midway through a semester period

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Like let's say this particular bond has a coupon paying

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eight percent a year So on a thousand dollars a

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principle this bond pays eighty bucks a year in the

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form of interest or forty bucks twice a year paid

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on june thirtieth in december thirty first Well think about

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the number's here on a monthly basis each month that

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bond creeps closer to its next interest payment and over

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the course of a year there are twelve creeps Different

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creeps each month that goes by the bonds creep further

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into the eighty dollars a year or eighty dollars per

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twelve months or eight twelves of a bond payment each

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month Well at eighty bucks a year despond pay six

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Dollars and sixty seven cents a month in interest Yeah

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we got the math there Yeah So let's say you

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sell it halfway into its period Presumably the market price

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would reflect the accrued interest on the bond or three

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months worth of interest or three times that six sixty

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seven figure or yes twenty bucks And that makes sense

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right You've held that bond a quarter a quarter of

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a year a quarter of a year's interest of eighty

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boxes one fourth of eighty or yep twenty So yeah

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the math works What do you know So the price

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of the bond would creep upward to reflect that accrued

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interest That is if you sold it on the exact

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end of the quarter that thousand dollar bond which was

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conveniently selling it exactly part The end of the last

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payment Well that bond would likely sell in the market

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place for about a thousand twenty dollars The buyer would

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get a check for forty bucks just ninety days later

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from the a company that issued the bond And well

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proud So come and listen to a story about a

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