Question

An investor purchased T-notes that mature July1, 1999 on February 20th, on a cash basis. How many days of accrued interest did the investor owe?

a. 49
b. 50
c. 51
d. 57

Answer 1

Accrued interest on a Treasury note is counted from the last interest payment date to the purchase date. Assuming the last interest payment was on January 1st and the purchase was on February 20th, there are 50 days of accrued interest.

Step-by-step explanation:

When an investor purchases Treasury notes between the last interest payment date and the next interest payment date, they must pay the seller the accrued interest as of the purchase date. This is because the seller held the note during that period and is entitled to the interest. To calculate the accrued interest, you count the number of days from the last interest payment date to the purchase date. Treasury notes pay interest every six months, so if we assume that the last interest payment was on January 1st and the notes were purchased on February 20th, there are 50 days of accrued interest (31 days in January + 19 days in February). However, if the last interest payment date was different, the number of days of accrued interest would change accordingly.

When an investor acquires Treasury notes between the last interest payment date and the next interest payment date, they are required to compensate the seller for the accrued interest up to the purchase date. This is because the seller held the note during that period and is entitled to the interest earned. To calculate the accrued interest, one needs to determine the number of days from the last interest payment date to the purchase date. Given that Treasury notes pay interest every six months, assuming the last interest payment was on January 1st and the notes were purchased on February 20th, there would be 50 days of accrued interest (31 days in January + 19 days in February). The exact number of days would vary depending on the specific last interest payment date. Accrued interest ensures a fair allocation of interest earnings between the buyer and the seller during the holding period.

Answer 2

The investor owes 130 days of accrued interest on the T-notes, from purchase on February 20th to maturity on July 1st, calculated by adding the actual days in each month within the period.

Step-by-step explanation:

To calculate the number of days of accrued interest the investor owes, we need to count the days from the purchase date, February 20th, to the maturity date, July 1st, of the T-notes. The count is done on a cash basis, meaning actual days are counted rather than using a standard 30-day month. Since it's not a leap year, February has 28 days. Then, we calculate the number of days in March, April, May, and June, which are all 31 days each. Finally, we calculate the number of days in July up until the 1st, which is 1 day. Adding up all these days, we have:

28 days (February) + 31 days (March) + 30 days (April) + 31 days (May) + 30 days (June) + 1 day (July 1st) = 151 days.

Therefore, the investor owes 151 days of accrued interest.

The number of days each month that should be counted is calculated as follows:

1. February: 8 days (from 20th to 28th, assuming it's not a leap year)
2. March: 31 days
3. April: 30 days
4. May: 31 days
5. June: 30 days
6. July: 1 day (the maturity date itself is not included in accrued interest calculation)

When you add up the days from each month, you get:

Total days = 8 (February) + 31 (March) + 30 (April) + 31 (May) + 30 (June) + 0 (July) = 130 days of accrued interest.