Final answer:
The purchaser of a bond sold between interest payment dates will usually pay the seller the price of the bonds plus the accrued interest. This compensates the seller for the interest that has accrued up to the sale date. Market interest rate fluctuations affect the pricing of bonds, especially as they near maturity.
Step-by-step explanation:
When bonds are sold between interest payment dates, the purchaser typically pays the seller the price of the bonds plus the accrued interest.
This additional payment compensates the seller for the interest that has accumulated from the last payment date up to the point of sale. This ensures the seller receives the interest for the portion of the payment period during which they held the bond, and the buyer is entitled to the full interest payment on the next payment date.
As a bond approaches its maturity date, it becomes sensitive to changes in market interest rates. If a bond is offering a coupon rate lower than the market interest rate, the seller may need to discount the bond below its face value to make it more attractive to potential buyers.
Calculation of the bond price incorporates expected payments, including the final interest payment and the repayment of the original amount borrowed.