Accrued Interest Adjustment - Explained
What is an Accrued Interest Adjustment?
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Table of ContentsWhat is an Accrued Interest Adjustment?Academics Research on Accrued Interest Adjustment
What is an Accrued Interest Adjustment?
Accrued interest adjustment is an accounting adjustment to the taxable income charged to the purchase of a convertible bond or other convertible security instrument. Basically, a convertible instrument accrues interest as its held. This interest is paid out in coupon payments. If you purchase an instrument in between payments, the purchase will pay the seller the value of the accrued interest up until the date of purchase. As such, when the purchaser later receives the coupon payment, the amount previously paid to the seller is deducted (for tax purposes) from the amount of the coupon received by the buyer.
This adjustment makes certain that the purchaser of the convertible instrument does not pay taxes on the coupon (or interest) that was not hers.
Academics Research on Accrued Interest Adjustment
- [PDF] North Korea-Japan Relations: The Normalization Talks and the Compensation/Reparations Issue, Manyin, M. E., & Foreign Affairs, Defense, and Trade Division. (2001, June). North Korea-Japan Relations: The Normalization Talks and the Compensation/Reparations Issue. Congressional Research Service, Library of Congress.
- Par-Par Asset Swap Spreads: An Illustration of How to Price Asset Swaps, Burgess, N. (2016). Par-Par Asset Swap Spreads: An Illustration of How to Price Asset Swaps. Available at SSRN 2809111. Asset swaps provide a form of asset financing, where investors borrow funds to purchase an asset, typically a bond. Asset swaps are also a good bond rich-cheap analysis tool. Such swaps can of course be used for speculative purposes. In this paper we provide a brief overview of asset swaps and derive a par-par asset swap spread formula incorporating bond accrued interest. Finally we illustrate how to calculate both the yield-yield and par-par asset swap spread using the liquid 10 year German Bund.
- Strengthening Treasury Direct, Coffey, W. J. (2001). Strengthening Treasury Direct. Wise investors in Treasury securities can deal directly with the Bureau of the Public Debt by opening a Treasury Direct account with a Federal Reserve Bank, thus avoiding charges imposed by banks and brokerage firms that frequently act as intermediaries for Treasury securities investors. Although there are several advantages to investing in Treasury securities, certain practices followed by the Federal Reserve Bank reduce interest rightfully due investors. This article cites examples of how the Federal Reserve Bank takes unfair advantage of its investors by avoiding full payment of interest. Investor record keeping problems also arise when the Federal Reserve Bank reopens a previously issued security. Recommendations are made for strengthening the Treasury Direct system with specific suggestions on how to achieve fair treatment for investors.
- The muni bond spread: Credit, liquidity, and tax, Ang, A., Bhansali, V., & Xing, Y. (2014). The muni bond spread: Credit, liquidity, and tax. Columbia Business School Research Paper, (14-37). Municipal (muni) bonds are risky and trade in illiquid markets, and both effects serve to raise muni yields relative to Treasuries. On the other hand, the tax exemption of muni bonds tends to lower their yields. We decompose the muni yield spread into credit, liquidity, and tax components. Before 2008, muni yields are reliably lower than Treasuries. After the 2008 financial crisis, the muni-Treasury spread flips sign to, on average, 0.87%, comprising credit, liquidity, and tax components of 0.57%, 2.14%, and -1.84%, respectively. Muni credit and liquidity components exhibit strong covariation with credit and liquidity factors prevailing in other asset classes.
- On the Calculation of Real Investment Returns, Wilkie, A. D. (1984). On the Calculation of Real Investment Returns. Transactions of the Faculty of Actuaries, 39, 105-130.