Accrued Interest

Another reason for the disparity between the yields on stocks that ought, on the face of things, to be identical, is concerned with the due date of the interest that is paid on the holdings. As interest is paid to stockholders at half-yearly intervals it follows that a holder who purchases just after an interest payment will have a full six months to wait for this first interest payment; whereas one who buys five months later will have only one month to go before receiving a full six months' interest. The first purchaser is buying capital only; the second is buying capital plus accrued interest to date. As a general rule, therefore, a 12% stock priced at par will rise in price £1 a month from the date of one interest payment until the day before the next interest payment. It will then drop by £6 to start rising again.

Government stocks are dealt in on the Stock Exchange 'ex-dividend' (buyer not entitled to the interest payment) for the five weeks before the interest due date, to give the Bank of England a chance to get the interest warrants made out and posted to the then registered stockholders. So anybody who buys 'ex-div' gets the capital only, and the price he pays will be proportionately down. One who buys 'cum-div', being entitled to the interest, will pay a correspondingly higher price.

Comparative Prices

The yields on gilt-edged stocks cannot become much out of line with one another, since the security of income and capital is the same in every case. There are, of course, variations arising from differences in redemption dates, the consequence of which have already been explained (see page 57 for a detailed calculation). As a very general rule it is good policy to buy gilts when interest rates are high, and sell them when interest rates are low. In this way you buy at a low price and sell at a high price.

Price and redemption yield

Changes in prices are not strictly in inverse... see: Comparative Prices

Refunds, Personal And Business Finance 2017

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