A Treasury note's coupon schedule gives it one half-year of 181 days and the next of 184 days. Under the Treasury's Appendix B method, how does one day of accrued interest compare between the two half-years?

It is the same in both, every day being one 360th of a year's interest on the 30/360 basis Treasury uses

It is larger in the 181-day half-year, each day being 1/181 rather than 1/184 of the half-year's interest

It is larger in the 184-day half-year, the three extra days each raising the interest earned for a day

It is the same in both, every day being one 365th of a year's interest whatever the half-year's length

Treasury computes accrued interest of 16.87500 dollars for each 1,000 dollars of par on a reopened note. How does it arrive at the accrued interest owed on a holding of 150,000 dollars par?

It rounds the figure for 1,000 dollars of par to the cent first, then multiplies that rounded cent figure by 150

It recomputes the interest on the whole 150,000 dollars directly, then rounds the outcome to the cent

It multiplies the rounded figure for 1,000 dollars of par by 150, giving 2,531.25 dollars

It divides the holding's annual interest by 365 and multiplies by the days, rounding to the cent

A Treasury note is issued on July 2 with its first interest payment on December 31, in a half-year of 184 days. For how many days of interest is its first payment computed?

182, counting from the day after issue up to and including the payment date

184, the full half-year in which the payment falls, as for a regular coupon

183, counting both the issue date and the payment date as days of accrual

181, the shortest half-year, which Treasury applies to any short coupon

A Treasury note's first interest period runs longer than a full half-year. How is its first interest payment built up?

A regular half-year of interest only, the extra days being paid at maturity together with the principal

A regular half-year of interest plus the daily decimal times the days of the initial fractional period

The daily decimal times every day since issue, with no regular half-year portion in the payment at all

Two regular half-years of interest, the first period being rounded up to a whole year of interest

A bond with a long first coupon is reopened while its dated date is less than six full months before the first interest payment. Interest has run for 44 days in one half-year and 81 days in the next. How is the accrued interest a buyer pays computed?

All 125 days are counted on a 30/360 basis against one full year's interest at the bond's stated coupon rate

All 125 days are multiplied by the single daily decimal of the half-year in which the reopening itself settles

Each block of days is multiplied by the daily decimal for its own half-year, and the two products are added

Only the 81 days of the current half-year are charged, the Treasury itself bearing the earlier 44 days of interest

Two municipal bonds trade on the same day. One has not yet paid its first coupon; the other has paid several. Under MSRB Rule G-33, from what date does each one's accrued interest run?

The first from its trade date, the second from its original dated date

Both from their dated dates, accrual always being measured from the date the issue began

The first from its trade date, the second from its previous interest payment date

The first from its dated date, the second from its previous interest payment date

A customer's purchase of a municipal bond settles on April 10. Under MSRB Rule G-33, what is the last day for which the buyer pays the seller accrued interest?

April 9, the settlement date itself being excluded from the count

April 10, the settlement date itself being included in the count

The trade date, accrual ending on the day the price was agreed

March 31, accrual being counted only in whole 30-day months

A customer's municipal confirmation shows an extended principal amount, an amount of accrued interest and a small charge for special delivery. How is the final monies total reached?

The charge is deducted from the accrued interest before the extended principal is added

The charge is added to the extended principal and the accrued interest combined

The charge is built into the dollar price, so it sits inside the extended principal

The charge is billed apart from the trade, the total being the extended principal alone

A dealer charges a flat 15 dollar fee on each municipal trade executed through its automated system. How does MSRB guidance treat that fee in the yield shown on the customer's confirmation?

It is built into the yield on dollar price trades, and is left out of it on trades done on yield

It is built into the yield, in the same way as a commission charged on an agency trade would be

It is left out of the yield, being a small flat charge not related to the par value traded

It is left out of the yield only when the customer has agreed to it in writing before the trade

How does an MSRB Rule G-15 confirmation of a customer's purchase of municipal fund securities differ from one for an interest-paying municipal bond?

It shows all those items, but only once a year in place of a confirmation per trade

It shows the same items, the fund's distribution rate standing in for the coupon rate

It shows the same items, except that the yield is replaced by the fund's total return

It shows no interest rate, accrued interest, extended principal, yield or dollar price

Under MSRB Rules G-12 and G-15, when must a confirmation state the dated date of the securities traded?

When the dated date affects the price or the interest calculation

On every confirmation, whatever the security's coupon or its price

When the securities were bought in the primary offering from the issuer

When the securities are in default as to principal or as to interest

A municipal bond pays interest monthly rather than semiannually. Besides its coupon rate, what does MSRB Rule G-12 require the inter-dealer confirmation to carry about its interest?

A yield restated on a semiannual basis so it can be compared with other municipal issues

Its first interest payment date and a statement of the basis on which interest is paid

A separate accrued interest figure for each month that has run since the dated date

The record date for each monthly payment due over the following twelve months

How does the dated date shown on a confirmation of an interest-paying stripped coupon municipal security, held by a custodian, differ from the one shown for the underlying bonds?

It is the date on which the custodian first took the bonds on deposit, not the bonds' own dated date

It does not differ, the stripped security simply carrying the underlying bonds' own dated date unchanged

It is the date interest begins accruing to the custodian for the owner, not the bonds' own dated date

It is the date of the single payment the security represents, the bonds' own dated date being dropped

An inter-dealer confirmation covers a municipal security maturing in five years that pays its whole return at redemption. What does MSRB Rule G-12 have the confirmation show?

Its accreted value to date, in place of both its par value and maturity value

Its par value and an accrued interest figure computed at the yield to maturity

Its par value and its original issue price, with no interest rate stated at all

Its maturity value and an interest rate of 0%, in place of its par value

A dealer sends a customer an initial confirmation of a when, as and if issued municipal trade. Under MSRB Rule G-15, which of these items may that initial confirmation leave off?

The accrued interest, the extended principal and the transaction's total dollar amount

The par value, the interest rate and the maturity date of the securities

The CUSIP number, the trade date and the dated date of the securities

The trade date, the dealer's capacity as agent or principal and the securities' description

A comparison system displays an alternative settlement date for a municipal trade, later than the contractual settlement date. The seller delivers on the contractual date. What follows under MSRB guidance?

The buyer may reject it as early and insist on delivery on the alternative date

The delivery is good, and the dollar price and accrued interest stay as computed

The delivery is good, but accrued interest is recomputed to the alternative date

The trade must be compared again, with price and accrued interest reset to that date

A dealer delivers a bearer municipal bond, traded and interest, twenty days before its next interest payment date, with that date's coupon still attached. The buyer rejects the delivery for that reason. Is the rejection proper under MSRB Rule G-12?

No: a seller may substitute a payment for a coupon only after the payment date has passed, so the coupon must stay attached

Yes: from the thirtieth day before the payment date the seller must substitute a draft or check for the coupon it delivers

No: from the thirtieth day before the payment date the seller may substitute a payment for the coupon, but is not obliged to

Yes: once the payment date is less than a month away the bond must travel without its coupon, the interest settled by a later claim

A registered municipal bond traded and interest is delivered after the record date for its next interest payment. Under MSRB Rule G-12, how does the buyer receive that interest?

Through a credit from the clearing agency, which reverses the payment it made to the holder of record

Through an adjustment at the next coupon, the paying agent splitting that coupon between the two holders

Through a claim on the issuer, which pays the buyer directly once the transfer has been recorded on its books

Through a draft or check from the seller, payable by the later of the payment and delivery dates

A municipal trade had a contractual settlement date before an interest payment date but settled by book-entry after it, and the payment went to the wrong party. To whom does the buyer direct its interest payment claim under MSRB Rule G-12(j)?

To the dealer that made the delivery of the securities

To the issuer's paying agent that made the interest payment

To the registered holder of the securities on the record date

To the clearing agency through which the trade was settled

A dealer receives another dealer's written notice claiming an interest payment on a municipal security under MSRB Rule G-12(j). What must it send back?

A copy of its delivery records, from which the claimant recomputes the amount

A check for the payment, or a statement of its basis for denying the claim

A statement referring the claim to the issuer's paying agent for settlement

A check for the payment, the rule giving the dealer no ground for a refusal

A dealer sells a corporate bond to a customer as principal at a mark-up, and another member buys one for a customer as agent for a commission. How do the two prices reported to TRACE differ?

Both prices include the member's remuneration, so each shows what the customer actually paid

Both prices exclude the member's remuneration, which is reported separately for each trade

The principal trade's price includes the mark-up; the agency trade's excludes the commission

The principal trade's price excludes the mark-up; the agency trade's includes the commission

A member's TRACE reporting system has no price field for a trade in a debt security. What does FINRA Rule 6730 have it report instead?

The coupon rate and the number of days of interest accrued

The yield of the trade and its settlement date, to derive a price

The par amount and the dollar amount of any mark-up charged

An investor buys bonds when interest is in arrears. The issuer later pays both the arrears that had accrued before the purchase and interest accruing after it. How does 26 CFR 1.61-7(c) treat the two parts?

The arrears are a return of capital reducing basis; the later interest is taxable interest

Both are taxable interest in the year received, the investor being the holder when paid

Both are returns of capital, reducing basis until the purchase price has been recovered

The arrears are taxable interest; the later interest is a return of capital reducing basis

An investor sells a bond between interest dates, and the buyer pays the quoted price plus the accrued interest. Under 26 CFR 1.61-7(d), how must the seller treat the accrued interest portion?

As part of the sale proceeds, so it enters the gain or loss on the bond

As interest, rather than as part of the proceeds of selling the bond

As a return of capital, reducing the seller's cost basis in the bond

As income of the buyer, who is taxed on it when the coupon is paid

A bond fund computes its net asset value on a day falling between its holdings' coupon dates. Under SEC Rule 2a-4, how does the interest its bonds have earned since their last coupons enter that value?

It is ignored, the bonds being valued at their market prices alone

It is included when the coupons are received by the fund in cash

It is included as interest income up to the date of the calculation

It is included on the record date of the fund's own next dividend

A debt instrument is first sold for a price that includes interest accrued before its issue date. Under 26 CFR 1.1273-2(m), which conditions allow its issue price to be computed without that interest?

The issuer elects the treatment in the indenture, and the pre-issue interest comes to less than one percent of the par amount

Part of the price is allocable to pre-issue interest, and the instrument is issued at par or at a premium to its par amount

The instrument pays stated interest at least semiannually, and its first interest payment falls within six months of its issue

Part of the price is allocable to pre-issue interest, and a stated interest payment within a year of issue at least equals it

A buyer pays 2,010 dollars at original issue for a note promising 2,000 dollars of principal and a first semiannual interest payment of 80 dollars; 10 dollars of the price is pre-issuance accrued interest. If the issue price is computed as 2,000 dollars, how is the 80 dollar payment treated?

10 dollars is a return of the excluded pre-issue interest and 70 dollars is interest payable on the note

All 80 dollars is interest payable on the note, the 10 dollars being added to the buyer's cost basis

70 dollars is a return of capital to the buyer and only 10 dollars is stated interest on the note

All 80 dollars is a return of capital to the buyer until the 2,010 dollar price has been recovered

A broker reports two customers' bond sales on which commissions were paid, one effected in 2012 and one in 2025. How does 26 CFR 1.6045-1(d)(5) treat the commission in each sale's gross proceeds?

For both years the broker must deduct it from the gross proceeds it reports

For 2012 the broker could choose to deduct it; for 2025 it must deduct it

For both years the broker reports proceeds before it, the customer deducting it

For 2012 the broker had to deduct it; for 2025 it may choose whether to deduct it

For Form 1099 reporting of a customer's bond sale, on what date does 26 CFR 1.6045-1(d)(4) treat the sale as occurring?

The next interest payment date falling after the trade has been made

The settlement date, on which payment and delivery are both completed

The date on which the sale is entered on the broker's books

The date on which the customer's trade confirmation is sent to them

Part of a customer's bond sale proceeds goes to repay the customer's margin loan, so it is never paid or credited to the customer. How does the repaid sum affect the gross proceeds reported under 26 CFR 1.6045-1(d)(5)?

It reduces gross proceeds, as a cost of the sale like a commission

It is left out, gross proceeds being only what the customer received

It is reported on its own as interest paid on the margin loan

It is added back, so the reported gross proceeds include it

All-In Bond Price: Clean Price, Dirty Price and Accrued Interest

What Is the All-In Price of a Bond, and How Do the Clean Price and the Dirty Price Fit Together?

The all-in price of a bond is the amount a buyer actually pays to settle a purchase. It has two parts. The first is the clean price, the dollar price quoted in the market and normally expressed per 100 of par value, which says nothing about interest. The second is the interest that has built up on the bond since its last coupon, or since its dated date if no coupon has yet been paid. Added together they give the dirty price, also called the full price or invoice price. The arithmetic is simple; the regulatory detail sits in how each part is measured, how it is shown to the customer, how it is reported to the market and how it is taxed.

This page follows the all-in price through the rules that fix it: the Treasury's offering regulations at 31 CFR Part 356 for marketable Treasury securities, MSRB Rules G-12, G-15 and G-33 for municipal securities, FINRA Rule 6730 for trade reporting to TRACE, the income tax regulation at 26 CFR 1.61-7, and SEC Rule 2a-4 for the net asset value of a mutual fund. The basic accrual mechanics, day count conventions and the reasons a buyer compensates a seller are covered on the Accrued Interest page and are only summarised here.

Clean Price, Accrued Interest and the Settlement Amount

The Treasury's own definitions show the structure plainly. Under 31 CFR 356.2, the settlement amount for securities awarded at auction is the par amount, less any discount amount or plus any premium amount, plus any accrued interest; for inflation-protected securities it also includes any inflation-adjusted principal. The price and the interest are kept apart because they measure different things. The price, applied to par, reflects what the market will pay for the bond's remaining payments; the accrued interest is a mechanical figure fixed by the coupon rate, the days elapsed and the day count rules of the security.

For an auction purchase, the Treasury defines accrued interest as an amount bidders must pay to it as part of the settlement amount, compensating the Treasury up front for interest that bidders will be paid but did not earn because it is attributable to a period before the issue date. In the secondary market the same compensation runs from buyer to seller. Either way, the buyer later collects a full coupon, part of which simply repays what was advanced at settlement.

How the Treasury Measures a Coupon and a Day of Accrual

Appendix B to Part 356 sets out how the Treasury computes interest on its fixed-rate notes and bonds. Interest is paid semiannually, and the regular payment period is a full half-year of six calendar months, such as February 15 to August 15. A regular semiannual payment is one half of a year's interest, computed on that basis regardless of the actual number of days in the half-year: a note with a par amount of 1,000 dollars and an 8 percent rate pays 40 dollars each period.

Accrual inside a period is measured differently. Where an interest period is shorter or longer than six months, or where an investor must pay accrued interest, the Treasury computes a daily interest decimal based on the actual number of calendar days in the half-year concerned. Half-years run from 181 to 184 days, and the Treasury's table shows that a half-year running through the end of February can be a day longer in a leap year. The daily decimal is 1/181, 1/182, 1/183 or 1/184 of a full semiannual payment, depending on which half-year applies. A day of accrual is therefore worth slightly more in a 181-day half-year than in a 184-day one, even though the full coupon for each half-year is the same.

The Treasury rounds every accrued interest computation to five decimal places for a 1,000 dollar par amount. For a larger holding it applies the appropriate multiple to the rounded figure for 1,000 dollars of par, and for a smaller holding the appropriate fraction. In one published example a 6 3/4 percent note accrued interest for 92 days of a 184-day half-year; the daily decimal of 0.183423913 multiplied by 92 gave 16.87500 dollars for each 1,000 dollar note, and a holding of 150,000 dollars par therefore paid 150 times that figure, or 2,531.25 dollars.

Short and Long First Coupons

A newly issued note does not always begin on a regular coupon date, so its first interest period may be shorter or longer than a half-year. Where the first period covers less than a full half-year, called a short coupon, the Treasury multiplies the daily interest decimal by the number of days from, but not including, the issue date to, and including, the first interest payment date. A 2-year note paying 8 3/8 percent that was issued on July 2, 1990, with its first payment on December 31, 1990, fell in a 184-day half-year but accrued interest for only 182 days, so its first payment was about 41.42 dollars per 1,000 dollars rather than the regular 41.875 dollars.

Where the first period covers more than a full half-year, called a long coupon, the first payment has two pieces. The Treasury multiplies the daily interest decimal by the days from, but not including, the issue date to, and including, the last day of the fractional period that ends one full half-year before the payment date, and adds that amount to the regular interest for the full half-year ending on the first payment date. A 7 7/8 percent note issued on December 3, 1990, with its first payment on August 15, 1991, earned 39.375 dollars for the regular half-year plus about 15.84 dollars for the 74-day fractional portion, a first payment of 55.21 dollars per 1,000 dollars.

Accrued Interest When the Treasury Reopens an Issue

The Treasury often reopens an outstanding note or bond, selling more of the same security after interest has already begun to run. Appendix B states that an investor must pay accrued interest when interest accrues before the issue date of the security: the investor will receive a full interest payment despite holding the security for only part of the period, so the investor compensates the Treasury at settlement. For a fractional part of one half-year, the number of days in that full half-year and the stated rate fix the daily decimal, which is multiplied by the days of accrual.

A reopening can straddle two half-years. If a reopened bond or note has a long first coupon and the dated date of the reopened issue is less than six full months before the first interest payment, the accrued interest falls into two separate half-year periods, and a separate daily decimal is multiplied by the days of accrual in each. In the published example a 10 3/4 percent bond issued on July 2, 1985, with its first payment on February 15, 1986, was reopened on November 4, 1985. Interest had accrued for 44 days in a 181-day half-year and for 81 days in a 184-day half-year, and the two products together gave accrued interest of 36.72798 dollars for each 1,000 dollar bond.

Inflation-Protected Securities and Floating Rate Notes

Two Treasury products add a further step to the all-in price. For Treasury Inflation-Protected Securities, Appendix B defines the settlement amount as the inflation-adjusted price plus the inflation-adjusted accrued interest, each being the unadjusted or real figure multiplied by the index ratio for the date concerned. The real accrued interest is computed from the days elapsed in the current semiannual period and the real coupon, in the same way as for a fixed-rate note.

Treasury floating rate notes accrue interest daily. The rate for each day is the index rate taken from the most recent 13-week bill auction before the accrual day, plus the spread fixed when the note was first auctioned, divided by 360 and subject to a zero minimum. A 13-week bill auction held in the two business days before a settlement date or an interest payment date is left out of the accrued interest used for that settlement amount or payment.

Municipal Accrued Interest Under MSRB Rule G-33

For municipal securities, MSRB Rule G-33 prescribes how dealers compute accrued interest, dollar prices and yields. Section (a) computes accrued interest as the interest rate multiplied by the par value multiplied by the number of days divided by the number of days in the year. The number of days runs from the previous interest payment date up to, but not including, the settlement date; for a first coupon, it runs instead from the dated date of the issue.

Section (e) of the rule fixes the counting. Computations are made on the basis of a 30-day month and a 360-day year, except that for securities paying interest solely at redemption the day count basis selected by the issuer is used. Day counts follow a formula that takes the difference in years times 360, plus the difference in months times 30, plus the difference in days, with adjustments when either date falls on the 31st of a month, and every period includes its first day but not its last.

The same accrued days, counted from the beginning of the interest payment period to the settlement date, are an input to G-33's dollar price and yield formulas for securities with periodic interest payments and for securities paying interest solely at redemption.

Reading a Municipal Confirmation: Extended Principal, Accrued Interest and Final Monies

MSRB Rule G-15(a) sets out what a dealer's confirmation to a customer must show, and its final monies section is where the clean price and the accrued interest are turned into the all-in amount. The confirmation must show the total dollar amount of the transaction, the amount of accrued interest, the extended principal amount, which is the dollar price applied to the par amount traded, and the nature and amount of any miscellaneous fees, such as charges for special delivery arrangements or a per-transaction fee. Rule G-12(c) requires the same accrued interest, extended principal and total dollar amount on confirmations between dealers.

MSRB interpretive guidance explains the order of the arithmetic. Miscellaneous charges are small amounts that some dealers add to the combined extended principal and accrued interest of a transaction before arriving at the final monies. In a 2001 notice the MSRB treated a flat 15 dollar transaction fee for automated execution as such a miscellaneous charge. Because these fees are small, are flat amounts and are not related to the par value of the transaction, unlike the commissions commonly charged on agency trades, they are not incorporated into the yield shown on the confirmation.

Some securities have no accrued interest line at all. No figure for accrued interest is shown for zero coupon securities, for securities traded on a discounted basis other than those traded on a yield-equivalent basis, or for municipal fund securities. Municipal fund securities are treated differently again: for them the confirmation shows no interest rate, no extended principal amount, and neither a yield nor a dollar price.

Dated Dates, Payment Frequency and Stripped Coupons on the Confirmation

Because the accrued interest on a trade depends on when interest began to run and how often it is paid, the MSRB requires confirmations to carry the facts needed to check it. Rules G-12(c)(vi)(A) and G-15 require a confirmation to state the dated date of the securities if it affects the price or the interest calculation, and the first interest payment date if interest is paid other than semiannually.

For securities with periodic interest payments that pay interest on other than a semiannual basis, Rule G-12(c)(vi)(H) also requires a statement of the basis on which interest is paid. Among the same special instructions are the notations "flat," for securities traded without interest, and "in default," for securities in default as to principal or interest.

Stripped coupon municipal securities represent ownership rights to discrete interest or principal payments on municipal securities held by a custodian, so the dated date of the underlying bonds does not tell the owner when its own interest began to run. For an interest-paying stripped coupon security, MSRB guidance and Rule G-15 require the confirmation to show the date that interest begins accruing to the custodian for payment to the beneficial owner, in place of the dated date of the underlying securities, together with the first date interest will be paid to the owner, whenever these are needed to calculate the price or the accrued interest.

Zero Coupon and When-Issued Trades

A security that pays its whole return at redemption has no coupon accruing between payment dates. Under Rule G-12(c)(v), a confirmation for a security maturing in more than two years and paying investment return solely at redemption does not show the par value and is not required to show accrued interest; instead it shows the maturity value of the securities and states the interest rate as "0%."

When-issued trades show the dependence of accrued interest on the settlement date most clearly. A dealer may send a confirmation for a "when, as and if issued" transaction executed before the settlement date has been determined. If it does, Rule G-15 requires all the usual information except the settlement date, the dollar price for a trade executed on yield, the yield for a trade executed on dollar price, total monies, accrued interest, extended principal and delivery instructions. G-12 likewise relieves the initial inter-dealer when-issued confirmation of the settlement date, accrued interest, extended principal and total dollar amount, and requires a confirmation showing the final settlement date to be sent at least three business days before settlement. Until the settlement date is known, the accrued days, and so the all-in amount, cannot be computed.

Once a contractual settlement date is fixed, it governs. In a published interpretation the MSRB addressed an alternative settlement date displayed by an automated comparison system and stated that it has significance for clearance purposes only and does not result in a recomputation of the dollar price or the accrued interest; a receiving dealer cannot reject a good delivery made on or after the contractual settlement date because it arrives before that alternative date.

Delivering Bonds Around an Interest Payment Date

Rule G-12(e) deals with deliveries that fall close to an interest payment. If securities are traded "and interest" and the settlement date is on or after the interest payment date, the securities are delivered without the coupon payable on that date. If delivery is made on or after the thirtieth calendar day before an interest payment date, the seller may deliver a draft or bank check, payable not later than the interest payment date or the delivery date, whichever is later, for the interest due in place of the coupon. The choice is the seller's: an MSRB interpretation confirms that a delivery with the coupon still attached is a good delivery, and rejecting it on that ground is improper.

Registered securities are handled by record date rather than by coupon. If a registered security traded "and interest" is delivered after the record date for determining the holders entitled to an interest payment, the delivery must be accompanied by a draft or bank check of the seller or its agent for the amount of the interest, payable not later than the interest payment date or the delivery date, whichever is later.

For a registered security in default as to principal or interest for which a date for paying the interest due has been set, a delivery made after the record date must be accompanied by a draft or check for the amount the issuer is to pay, unless the security is traded "ex-interest."

Interest Payment Claims Between Dealers

Interest that goes to the wrong party can be recovered under Rule G-12(j). A dealer seeking to claim an interest payment on a municipal security from another dealer sends a written notice of claim; the receiving dealer must send either a draft or bank check for the amount of the interest payment or a statement of its basis for denying the claim. It must do so no later than 10 business days after receiving the notice, or 20 business days where the claimed payment was scheduled to be made more than 60 days before the date of the claim.

The rule also says where a claim goes. A claim arising from a transaction with a contractual settlement date before the interest payment date that was settled by book-entry on or after that date is directed to the dealer that made the delivery. A claim on a previously delivered bearer security is directed to the dealer that delivered it, and a claim on a registered security previously delivered in a dealer's name is directed to that dealer.

TRACE Reports the Clean Price

For corporate and other TRACE-eligible debt, FINRA Rule 6730 requires each trade report to show the price of the transaction or the elements necessary to calculate the price, which the rule names as the contract amount and the accrued interest. The reported price is therefore the clean price: the accrued interest is not part of it, and where a member's reporting system has no price field, it reports the contract amount and, if applicable, the accrued interest, from which the price can be derived.

What the price includes depends on the member's capacity. For a principal transaction the reported price must include the mark-up or mark-down. For an agency transaction the reported price must exclude the commission, and the member reports the total dollar amount of any commission assessed on the trade separately. A member need not include a commission, mark-up or mark-down that is not assessed on a trade-by-trade basis at the time of the transaction.

For when-issued transactions in Treasury securities executed before the auction, Rule 6730 has the member report the yield instead of a price.

Tax Treatment of Accrued Interest for the Seller and for a Buyer of Defaulted Bonds

The income tax regulation at 26 CFR 1.61-7 follows the split between price and interest. Under paragraph (d), when bonds are sold between interest dates, part of the sales price represents interest accrued to the date of the sale and must be reported as interest income. The seller does not treat the whole amount received as proceeds of selling the bond; the accrued interest component is taxed as interest.

Paragraph (c) deals with a buyer who purchases bonds when interest has been defaulted, or when interest has accrued but has not been paid. Any interest that is in arrears but had accrued at the time of purchase is not income and is not taxable as interest if it is later paid. Such payments are returns of capital that reduce the buyer's remaining cost basis. Interest that accrues after the date of purchase, however, is taxable interest income for the year in which it is received or accrued, depending on the taxpayer's method of accounting.

Accrued Interest in a Fund's Net Asset Value

A mutual fund that holds bonds prices its shares from its net asset value, and SEC Rule 2a-4 defines how that value is computed. Portfolio securities with readily available market quotations are valued at current market value, and other assets at fair value determined in good faith by the board. Paragraph (a)(6) requires interest income and other income to be included to the date of calculation, so the fund's daily value reflects the interest its bonds have earned since their last coupons, not only their quoted prices.

Paragraph (a)(4) applies the same discipline to expenses, which are included to the date of calculation. Paragraph (b) then provides a small exception: the expense and income items that paragraphs (a)(4) and (a)(6) would otherwise require need not be reflected if, cumulatively and when netted, they do not amount to as much as one cent per outstanding share.

Pre-Issuance Accrued Interest and the Issue Price

Accrued interest also arises when a new debt instrument is first sold after the date from which it bears interest, so that part of what the first buyer pays is interest that accrued before the issue date. For tax purposes, 26 CFR 1.1273-2 determines the issue price of a debt instrument, and its paragraph (m) gives an alternative treatment for this pre-issuance accrued interest. The alternative is available only if two conditions are both met: a portion of the initial purchase price of the instrument is allocable to interest that accrued before the issue date, and the instrument provides for a payment of stated interest on the first payment date within one year of the issue date that equals or exceeds the amount of that pre-issuance accrued interest.

Where the conditions are met, the issue price may be computed by subtracting the pre-issuance accrued interest from the issue price otherwise determined. The treatment is permissive rather than compulsory. If the issue price is computed in that way, a portion of the stated interest paid on the first payment date must be treated as a return of the excluded pre-issuance accrued interest, rather than as an amount payable on the instrument.

The regulation works an example. A buyer purchases a corporate debt instrument at original issue on January 15, 1995, for 1,005 dollars; it promises 1,000 dollars of principal on January 1, 2005, and semiannual interest of 60 dollars on January 1 and July 1, beginning July 1, 1995. Five dollars of the purchase price is allocable to pre-issuance accrued interest, so the issue price may be computed as 1,000 dollars, and if it is, 5 dollars of the 60 dollar payment on July 1, 1995 is treated as the issuer's repayment of that pre-issuance accrued interest.

Broker Reporting of a Bond Sold Between Interest Dates

The broker's information return follows the same split between the price and the interest. Under 26 CFR 1.6045-1(d)(3), for each sale of a debt instrument before maturity that a broker must report, the broker must show separately on Form 1099 the amount of accrued and unpaid qualified stated interest as of the sale date, the amount the customer reports under 1.61-7(d). That interest information is shown in the manner and at the time required by Form 1099 and section 6049.

Paragraph (d)(5) defines the gross proceeds of a sale as the total amount paid to the customer or credited to the customer's account as a result of the sale, reduced by the amount of any qualified stated interest reported under paragraph (d)(3), and increased by any amount not paid or credited because it went to repay a margin loan. The figure reported as gross proceeds is therefore the sale amount without the accrued interest, which appears on its own line. For sales on or after January 1, 2014, the broker must also reduce gross proceeds by the commissions and transfer taxes related to the sale; before that date a reduction was permitted but not required.

Paragraph (d)(4) fixes the date of the sale for reporting: other than for digital assets, a broker reports a sale as occurring on the date the sale is entered on the broker's books.

Common Errors and Exam Traps

A frequent error is to treat the quoted price as what the buyer pays. The quoted price, the TRACE price and the dollar price on a confirmation are all clean; the buyer pays the extended principal plus accrued interest, plus any miscellaneous fees, and those fees are not built into the confirmed yield.

A second error is to assume every Treasury coupon is a regular half-coupon. Short and long first coupons are paid on the actual days of the first period, and a reopening can carry accrued interest spanning two half-years, each with its own daily decimal.

A third is to think a confirmation always shows accrued interest. Zero coupon securities, discount-basis securities and municipal fund securities show none, and an initial when-issued confirmation omits it because the settlement date is not yet known.

A fourth concerns tax. The seller reports the accrued interest received at sale as interest income, while a buyer of bonds with interest in arrears treats later payments of that pre-purchase interest as a return of capital that reduces basis.

Examination Relevance and Key Takeaways

The all-in price is tested wherever securities examinations cover bond settlement, confirmations and pricing. Candidates should be able to separate the clean price from the accrued interest, compute the all-in amount from a confirmation, and explain why a particular security shows no accrued interest.

The key points are these. The clean price is quoted and reported; the dirty price is paid. The Treasury pays regular coupons as half a year's interest but accrues by the actual days of each half-year. Municipal accrued interest runs from the last coupon or the dated date to the day before settlement on a 30/360 basis. TRACE reports the clean price including any mark-up. Accrued interest received by a seller is interest income, and a fund's net asset value includes interest earned to the date of calculation.