SIE (Securities Industry Essentials) Practice Exam

The computation of dollar prices and accrued interest on corporate bonds is normally on what calendar basis?

1. Actual/365

2. 30/360

3. Actual/Actual

4. 360/365

The correct answer is: 30/360

Corporate bonds are typically calculated on a 30/360 basis, meaning that a year is considered to have 360 days with each month having 30 days. This method is used for convenience and ease of calculation. Option A, Actual/365, means that the actual number of days in a year is used for the calculation of interest, which is not the standard practice for corporate bonds. Option C, Actual/Actual, means that the actual number of days in both the numerator and denominator of the fraction is used, which is not commonly used for corporate bonds. Option D, 360/365, also does not follow the standard practice for corporate bonds as it assumes that there are 360 days in a year, but uses the actual number of days in the denominator for the calculation of interest. Overall, the 30/360 basis is the most commonly used for the calculation of dollar prices and accrued interest on corporate bonds.