No doubt the Series 7 accrued interest topic is a time consuming one to learn. From a tutors perspective, it’s also not a short one to teach. From a cost benefit angle, is it therefore worth the effort?
And today’s post we try to answer that question.
Series 7 Accrued Interest…What Is It?
On the Series 7 Exam, the topic of accrued interest pops up in the Municipal Bonds section. Accrued interest from this perspective is the interest owed to a seller of a municipal (or any) bond that is selling in between coupon payments.
The buyer is due to receive the full coupon at the next coupon payment date, so therefore must compensate the seller for the interest they deserve, but will miss out on, by selling in between payments. Accrued interest gets calculated generally, by determining what is owed from the last coupon payment up to the day before the settlement date of the transaction.
Many Series 7 practice questions ask you to calculate the exact days of accrued interest due. You may also find questions about the exact dollar amount due for accrued interest.
What makes these questions so difficult are the variations of possible questions.
Accrued Interest and Accrued Headaches
The number of days of accrued interest will be different for Treasury bonds than they are for corporate bonds and municipal bonds, as of this writing. The reason being that they involve different settlement dates. Accrued interest can also be different depending on whether settlement is regular way versus cash settlement.
Given the wide range of possible scenarios, this section induces confusion. Hence, we recommend a once over, and then if you don’t understand it, leave it on the back burner. Once you feel you have mostly conquered other more important sections, come back to it.
Our caveat here of course is that if you give up a point in one section, you have to make it up in another.
Accrued interest questions are unlikely to show up more than a couple times on the exam, in our view. Therefore, we recommend that you spend your effort in other sections, such as Options, Investment Companies, other parts of Municipal Securities, as well as New Issues, before you decide to tackle accrued interest. If you need any help, feel free to reach out! Good luck!