Accrued interest must be paid annually on a 7% coupon paying €1,000 par bond bought between interest dates.On January 1st you bought a bond issues by the Hardy Can Company with interest
Dates of April 15th and September 15th.Approximately, how much of the amount you paid for the
Bond was accrued interest?

Question

Quizplus · Accepted Answer

There are 2 interest payments per year, so each payment will be for 6 months of interest. 
The bond was bought between interest dates so the buyer must pay the accrued interest for the period of time the bond was held before the next interest payment date. 
Since the bond was bought on January 1st and the next interest payment date is on April 15th, the buyer held the bond for 3.5 months before the first interest payment. 
Accrued interest for 3.5 months can be calculated using the formula: (annual coupon rate/2) x (number of months held/6) x par value of bond = (7%/2) x (3.5/6) x €1,000 = €20.42 
Therefore, approximately €20.42 of the amount paid for the bond was accrued interest. 
The best answer choice is B.

Accrued Interest Must Be Paid Annually on a 7% Coupon