When does the accrued interest for a bond purchase begin?

When does the accrued interest for a bond purchase begin?

• A. From the date of the last interest payment
• B. After the first interest payment is received
• C. Immediately upon purchase
• D. At the end of the settlement date

Answer: (A)

The correct answer is that the accrued interest for a bond purchase begins from the date of the last interest payment. This is because when an investor purchases a bond, they are essentially buying it between the bond’s scheduled interest payment dates. The seller of the bond is entitled to the interest that accrued from the last payment date up to the settlement date. Consequently, the buyer will need to compensate the seller for this accrued interest. This practice ensures that the seller receives payment for the portion of the interest that they earned before selling the bond, while the buyer will begin earning the full interest beginning with the next scheduled payment after the settlement date.

The timeline of interest payments is crucial in understanding how accrued interest functions, as it directly affects both parties’ financial positions related to the bond.