The clients who are yet to deal with the issue of aliquot interest return often cannot understand why they need to buy bond for a price that is higher than their nominal value. We will now use a simplified example to explain the matters.
A model bond due in 2023 with the return of 7.25%, due always on 10 February, with the nominal value of EUR 1,000:
In the case of a bond like this, all current bond owners are paid out a return of 7.25% each year on 10 February. The current owner will be paid a return of EUR 72.5 for each bond (prior to taxation). It is a compensation for the client given that he or she left the money at
the issuer’s disposal to “work” with it. That said, what happens if the client’s money did not “work” for the issuer for the whole period of 12 months? If the bond was owned by A for a third of the year and by B for the remaining two thirds of the year? It would be logical that
the issuer is to pay A a sum of EUR 24,16 and to pay B a sum of EUR 48,33. Such a way of payout would be highly impractical.
That is why it is customary that the B owner buys the bond from the A owner in June for a sum that already includes a part of the annual return – the aliquot interest return (AIR). In February, the B owner will be paid out the full return. That is why the purchase price of the
bonds for the B owner will be calculated as the nominal value of the bonds (i.e. EUR 1,000/pc) + the AIR valid for the given day, e.g. EUR 24. The purchase price of the bonds will thus be EUR 1,024 on the given day.