How is the Price of a bond calculated? What is the total consideration amount of a trade and what is accrued interest?
The price of a bond is nothing but the sum of present value of all future cash fl ows of the bond. The interest rate used for discounting the cash fl ows is the Yield to Maturity (YTM) (explained in detail in question no. 24) of the bond. Price can be calculated using the excel function ‘Price’ (please refer to Annex 4, serial no 5.). Accrued interest is the interest calculated for the broken period from the last coupon day till a day prior to the settlement of the date of trade. Since the seller of the security is holding the security for the period up to the day prior to the settlement date of the trade, he is entitled to receive the coupon for the period held. During settlement of the trade, the buyer of security will pay the accrued interest in addition to the agreed price and pays the ‘consideration amount’. An illustration is given below; For a trade of Rs.5 crore (face value) of security 6.49%2015 for settlement date August 26, 2009 at a price of Rs.96.95, the consideration amou
