Purchasing corporate bonds half way through coupon period

[Neel94]

Hi all,

Me and my father have been option traders for quite a while, but have recently been dipping our fingers into the Bond Market due to attractive interest rates. We have a bit of cash at hand and we want to hold bonds till maturity as they offer better returns than the banks.

I have one question however with regards to the IB Brokers platform.

I have been looking at HSBC 6.5% Bond maturity 7 July 2023.

Are the prices quoted clean or dirty? I’ve read they are clean and I (the buyer) will have to pay the interest that the seller has accrued so far from holding the bond. I bought £2,000 worth on the platform at a price of 100.01, and on the order form and confirmation a total of £2020 left my cash account + commissions.

Now I thought the buyer pays the accrued interest to the seller at the point of sale of the bond. Was the price I paid (£2020) including the accrued interest the seller was due or will this payment leave my account at a later date? On the transaction history it says at the price I bought the bond at the yield is roughly around 6%.

I have a bit more cash I want to invest with this bond but started with a small amount to see how it works.

So in simpler terms is the accrued interest paid to seller at the point of transaction or does this come out of my account at a later point? i.e when the coupon is paid to me on July 7th 2023… or any other way?

I’m reading in quite a few places the accrued interest is paid to seller at the point the buyer buys the bond! However this is then contradictory to IB quoting clean prices and only £2020 leaving my account on the transaction explained above!

if anyone could chime it I would greatly appreciate it!!

 

[xandman]

Accrued interest paid to seller at the point of transaction. It is baked in the price up to the Ex-coupon date. Just like a stock dividend.

https://www.investopedia.com/terms/e/ex-coupon.asp

 

[Neel94]

Yes I get that by reading it.

SO are you saying the price I paid for the bonds - (2 increments of £2,020 total at a price of 100.01) had the accrued interest owed imbedded into that cost ?

From what I’m also reading it says the prices quoted for bonds are the clean price (excluded accrued interest). So if IB quoted me 100.01 for the bond that’s the clean price. According to certain sources. But then obviously that contradicts what you just said…. What you said is also how I assumed it worked! But from what I’m reading online it’s all contradictory.

 

[xandman]

Yes I get that by reading it.

SO are you saying the price I paid for the bonds - (2 increments of £2,020 total at a price of 100.01) had the accrued interest owed imbedded into that cost ?

From what I’m also reading it says the prices quoted for bonds are the clean price (excluded accrued interest). So if IB quoted me 100.01 for the bond that’s the clean price. According to certain sources. But then obviously that contradicts what you just said…. What you said is also how I assumed it worked! But from what I’m reading online it’s all contradictory.

I was never aware of that. Sorry. You might want it straight from the horse's mouth, your broker's. And, have them point you to the legal documentation.

It would be very kind of you to share your findings.

 

[xandman]

I'm fishing for this info. At the least, we know that the interest paid will be reflected in your statement.

https://www.ibkrguides.com/reportingreference/reportguide/bondinterestpaid_default.htm

My new thinking is that coupons are settled on the coupon date as nobody should be given a free ride or float. This would support the idea that we quote and trade at the clean price. You recieve the full coupon as holder on record and the broker backs out the amount that is due the seller for his portion of the accrued. All as simultaneous entries. I am catching up with your understanding.

Strange that there is no "Disclosure Statement for Bonds."

 

[Neel94]

I’ve also just found out how it works.

I’ve literally had a look at my statement. The interest had accrued to the seller.

however - when you place a trade on the platform, it will not show you accrued interest you’ll be paying to seller, only the clean bond price.

So on my statement it actually has a tab next to the trade “accrued interest” and the total deducted was actually around £2090 instead of £2020!

it’s quite silly how it works, it should really show you the total price you pay when you chose to initiate a limit order.

So in this instance I’ll be yielding just over 1.6% in 3 and a bit months, which still, isn’t too bad.

 

[xandman]

I’ve also just found out how it works.

I’ve literally had a look at my statement. The interest had accrued to the seller.

however - when you place a trade on the platform, it will not show you accrued interest you’ll be paying to seller, only the clean bond price.

So on my statement it actually has a tab next to the trade “accrued interest” and the total deducted was actually around £2090 instead of £2020!

it’s quite silly how it works, it should really show you the total price you pay when you chose to initiate a limit order.

So in this instance I’ll be yielding just over 1.6% in 3 and a bit months, which still, isn’t too bad.

One would think IBKR would provide an Accrued interest column for the dashboard as well. There is none.

 

[mervyn]

I’ve also just found out how it works.

I’ve literally had a look at my statement. The interest had accrued to the seller.

however - when you place a trade on the platform, it will not show you accrued interest you’ll be paying to seller, only the clean bond price.

So on my statement it actually has a tab next to the trade “accrued interest” and the total deducted was actually around £2090 instead of £2020!

it’s quite silly how it works, it should really show you the total price you pay when you chose to initiate a limit order.

So in this instance I’ll be yielding just over 1.6% in 3 and a bit months, which still, isn’t too bad.

interest accrued to the holder on date/365 or days/360, you wil pay the accrued interest to the seller on the date of settlement, that is pretty much standard in bond trading.