A question I heard recently: Any bond traders out there that just love discussing interest accrual? Have a client disagreeing with me over number of days of interest paid on a bond. Issue settles 1/23/06 (long 1st cpn) and 1st pays 7/31/06. With a 30/360 SIA day count, how many days of accrued should be paid?
Many people answered 105 days, but a few calculated accrual like this:
1/23/06 thru 1/31/06 = 9days
2/1/06 thru 5/8/06 = 97 days
The response to that calculation: I got 105, if it accrues 30/360, why does the 31st of January count in this scenerio?
The reason Jan. 31st would count: Since it would pay the 31st of Jan/July. SIA convention says treat 1/23/06 to 1/31/06 as 1 then 1/31/06 to 5/8/06, otherwise you lose a day of interest from 1/23/06 to 1/31/06…
The reason this is different is due to the passing of a “coupon date”. So you’d want to compute the number of days prior, then since coupon seperately. Not as if it was a period between coupons (like if it paid 1/20 & 7/20. So since this pays 1/31 & 7/31 (but they skip 1/31 cause an 8 day coupon is dumb), you split up the accruals.
this is something that people argue over constantly, even guys trading bonds for 20+ years. In case anyone cares, this is discussed in SIA Standard Securities Calculation Methods 1993, vol. 1, pages 17-35.