Fixed Income
Class Notes
Chapter 4 – 10/27/11
Accrued interest
is interest earned but not yet paid. As time goes on, a bond will accrue interest payable to the
bondholder. As interest payments are made, for example by a coupon’s
redemption, accrued interest is
reduced by the amount paid.
Immediately before a coupon date, accrued interest equals the full coupon payment and the present value of
the next
coupon payment equals that same payment.
Discount factors summarize market prices for money on future dates while interest rates simply quote those
prices derived from whatever convention is deemed most convenient for the application on hand.
When cash flows (interest or principal repayments) occur in other than six month increments,
semiannual
compounding is very awkward
Monthly or daily comp8nding of interest that allows redemption of interest at any time is called continuous
compounding
.
When cash flows arrive at different times, the continuous compounding convention is most convenient.
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 Spring '11
 Mimir

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