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What is a bond’s invoice price?

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When buying a bond, all interest that has accrued since its last interest payment is added to the dealer’s ask price and received by the buyer at the next interest payment dateAccrued interest is the interest that accumulates on the principal amount of a debt instrument after a debt’s last interest payment, the amount being earned by but not yet paid to the holder.

Accrued Interest = Coupon × (Days Since Last Coupon / Days in Current Coupon Period)

The price quoted for a bond in most markets is its clean price, it excluding accrued interest.  The dirty price is the bond’s clean price plus any accrued interest.

Clean Price = Quoted Price
Dirty Price = Invoice Price = Clean Price + Accrued Interest

To determine the amount the buyer will be invoiced for the instrument, the appropriate accrued interest day-count convention must be used.

US T-notes and T-bonds, all bonds traded in the Common Wealth countries, Euro-denominated bonds and Eurobonds issued after 1999 use the actual/365 day-count convention, which counts the actual number of days in the interest period divided by 365 or, if a leap year, 366.  US federal agency, municipal and corporate bonds use the 30/360 day-count convention, which counts every month as 30 days or 31 days only when the last day is the 31st and the first day is not either the 30th or 31st (but, not extended to 30 days if the last day of the month is in February) and each year as 360 days.

The actual/360 used in the US money market, the Eurocurrency LIBOR money market and the majority of domestic money markets is the interest day-count convention based on the actual number of days in the interest period divided by 360.  The actual/365 fixed is the day-count convention used in the money markets of the Common Wealth countries, Poland, Japan, Taiwan and Thailand, based on the actual number of days in the interest period divided by 365 – it ignoring leap years.  The formulas to compare yields quoted on the bond basis with those quoted on the money market basis, and vice versa, are:

Money Market Basis = Bond Basis x 360/365
Bond Basis = Money Market Basis x 365/360

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