Question: Bonds can be sold to a group of known investors or to the public in general. Often, companies will

print bond indentures but not issue them until the money is needed. Thus, many bonds are sold on a day that

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falls between two interest dates. Payment must still be made to creditors as specified regardless of the length of

time that the debt has been outstanding. If an interest payment is required by the contract, the debtor is legally


For example, assume that the Brisbane Company plans to issue bonds with a face value of $400,000 to a

consortium of twenty wealthy individuals. As with the previous note arranged with the bank, these bonds pay a 6

percent annual interest rate with payments every May 1 and November 1. However, this sale is not finalized until

October 1, Year One. The first six-month interest payment is still required on November 1 as stated in the contract.

After just one month, the debtor will be forced to pay interest for six months. That is not fair and Brisbane would

be foolish to agree to this arrangement. How does a company that issues a bond between interest payment dates

ensure that the transaction is fair to both parties?

Answer: The sale of a bond between interest dates is extremely common. Thus, a standard system of aligning

the first interest payment with the time that the debt has been outstanding is necessary. Brisbane will have to pay

interest for six months on November 1 even though the cash proceeds from the bond have only been held for one

month. At that time, the creditor receives interest for an extra five months.

Consequently, such bonds are normally issued for a stated amount plus accrued interest. The accrued interest

is measured from the previous payment date and charged to the buyer. Later, when the first interest payment is

made, the net effect reflects just the time that the bond has been outstanding. If issued on October 1, Year One,

the creditors should pay for the bonds plus five months of accrued interest. Then, when Brisbane makes the first

required interest payment on November 1 for six months, the net effect is interest for one month—the period since

the date of issuance (six months minus five months).