Answer-first summary for fast verification
Answer: $0.4420
For a **Treasury bond**, accrued interest is based on **actual/actual** day count. - Semiannual coupon = \(1000 \times 12\% / 2 = 60\) - Days from January 1 to March 1 = **59** - Days in the coupon period from January 1 to July 1 = **181** So: \[ AI(T)=60\times\frac{59}{181} \] For a **corporate bond**, accrued interest is usually based on **30/360**: - Days from January 1 to March 1 = **60** - Coupon period length = **180** days So: \[ AI(Corp)=60\times\frac{60}{180}=20.0 \] Then: \[ AI(Corp)-AI(T)=20.0-60\times\frac{59}{181}\approx 0.442 \] So the increase in accrued interest is approximately **$0.4420**. Correct answer: **B**.
Author: Manit Arora
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Q-719.3. A U.S. Treasury bond with a face value of $1,000.00 pays a 12.0% coupon on January 1st and July 1st. The bond settles on March 1st, such that interest accrues from January 1st to March 1st; call this amount of accrued interest, AI(T). If the bond were instead a corporate bond, the accrued interest on the same settlement date would instead be given by AI(Corp). What is nearest to the INCREASE in accrued interest, if we switched from a U.S. Treasury to a corporate bond; i.e., what is AI(Corp) - AI(T)? (note: inspired by Hull's EOC Problem 6.1)
A
Zero
B
$0.4420
C
$1.2970
D
$3.8020
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