Bonds issued after they're dated

[ChaoZ]

I get this but just don't understand the logic of it.

Suppose a bond is dated Jan. 1, but isn't sold till March. 1. The bond has a face value of $700,00 and 12% annual interest. Interest are paid on 6/31 and 12/31. So, the buyer would have to pay $700,000 and $14,000. They'll receive interest on the $700,00 for 4 months (which is $28,000) and just get back the $14,000.

So essentially the borrower gets a 4 month interest free loan on the $14,000. That's what I don't get. Why would the buyer go through a deal like this.

 

[Ns1]

Originally posted by: ChaoZ
I get this but just don't understand the logic of it.

Suppose a bond is dated Jan. 1, but isn't sold till March. 1. The bond has a face value of $700,00 and 12% annual interest. Interest are paid on 6/31 and 12/31. So, the buyer would have to pay $700,000 and $14,000. They'll receive interest on the $700,00 for 4 months (which is $28,000) and just get back the $14,000.

So essentially the borrower gets a 4 month interest free loan on the $14,000. That's what I don't get. Why would the buyer go through a deal like this.

"interest payments on bonds are generally made semiannually. However, bonds are usually sold between interest dates, which requires additional entries for accrued interest at the time of sale. The amount of interest that has accrued s ince the last interest payment is added to the price of the bond. The purchaser pays such interest and is reimbursed at the next payment date upon the receipt of a full period's interest."

So in summary...

- Seller sells bond for price + interest accrued during months 1-4
- First coupon payment buyer receives interest for 6 months, thereby "refunding" him the accrued interest he paid during months 1-4
- second coupon payment buyer receives interest for 6 months
- seller pays interest for all 12 months

- so where are you going with this?

 

[ChaoZ]

Originally posted by: Ns1
The amount of interest that has accrued s ince the last interest payment is added to the price of the bond.

Ok, that makes more sense.