On Tuesday, June 16, an investor purchases for regular-way settlement, $20,000 face value of 8% municipal bonds that mature on November 1, 2035. What is the dollar amount of accrued interest that the investor is required to pay?$75.55$208.88$213.33$1008.88
$208.88With the maturity falling on November 1, the other interest payment date would be May 1. The trade on Tuesday, June 16, would settle on Thursday, June 18. Accrued interest on municipal bonds is calculated on a 30/360 day basis resulting in 30 days for the month of May and 17 days for June, (up to but not including settlement), for a total of 47 days. The amount of interest paid is calculated based on the following Accrued Interest formula.Accrued Interest = (Principal x Rate x Days of Interest) / 360 = ($20,000 x 8% x 47) / 360= $208.88
To calculate accrued interest on a bond, we need to determine the number of days it has been since the last interest payment, and then multiply that by the daily interest rate.
The first step is to determine the number of days between the last interest payment and the settlement date.
The bond in question pays interest on November 1st of each year. Since the settlement date is June 16, we know that the bond has accrued interest for a total of 228 days (from November 1 to June 16).
Next, we need to determine the daily interest rate by dividing the annual interest rate by 365 days:
8% / 365 = 0.0002192
Finally, we can calculate the accrued interest by multiplying the face value of the bond by the daily interest rate and the number of days since the last interest payment:
$20,000 x 0.0002192 x 228 = $1008.88
Therefore, the dollar amount of accrued interest that the investor is required to pay is $1008.88.
The correct option is: $1008.88.
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