In the context of bond sales, who is responsible for paying accrued interest upon purchase?

• A. The seller
• B. The buyer
• C. Both parties share the cost
• D. The market maker

Answer: (B)

In bond sales, the buyer is responsible for paying accrued interest upon purchase. This is due to the nature of how interest is typically accrued on a bond. When a bond is sold between interest payment dates, the seller is compensated for the interest that has accumulated since the last payment date. The buyer, upon purchasing the bond, essentially takes over the obligation of interest payments owed, as they will receive the next interest payment in full at the designated payment date.

The accrued interest is calculated based on the number of days since the last interest payment was made up to the settlement date of the transaction. Therefore, the buyer pays this accrued interest to the seller as part of the purchase price, which helps to ensure a smooth transition and fair compensation for the interest that has accrued during the time the seller held the bond. This practice aligns with standard market procedures, ensuring that interest payments are fairly allocated according to ownership periods.