How much accrued interest will Miss Jones pay for a 7% municipal bond purchased on March 18?

To determine the accrued interest for a municipal bond purchased on March 18, it is essential to understand the mechanics of how accrued interest is calculated.

Municipal bonds typically pay interest semi-annually. In this case, the bond has a coupon rate of 7%, meaning it pays 7% of its face value each year, divided into two payments. If we assume the face value of the bond is $1,000, then the annual interest would be $70 (7% of $1,000), and each semiannual payment would be $35.

When purchasing a bond between interest payment dates, the buyer must pay the seller accrued interest, which is the interest that has accumulated since the last coupon payment. To calculate the accrued interest, you first need to find out how many days have passed since the last coupon payment up to the purchase date.

Typically, municipal bonds pay interest on January 1 and July 1. If the bond was purchased on March 18, the last interest payment would have occurred on January 1. The period from January 1 to March 18 is a total of 76 days.

To calculate the accrued interest, use the formula:

Accrued Interest = (Annual Interest Payment / 360