Gilt accrued interest calculation in ex-dividend period

mrdarcy86

Hi all

I bought TR63 government bond on 18th of October 2023. This purchase was within the ex-dividend period of the bond - ex-dividend date was the 12th October, coupon payment date was the 23rd October. (The bond pays interest in May and October)

Subsequently I wasn't entitled to the coupon payment on 23rd October which is expected. However, for that transaction, HL charged me 156 days of accrued interest, counting from May 22nd. 

I spoken with HL who explained that, more or less, this is expected when buying within the ex-dividend period. However, that doesn't seem correct to me.

So the seller of the bond was entitled to the accrued interest because they held it on the ex date, and as a buyer I was charged that interest, yet I wasn't entitled to the corresponding coupon.

Anyone knows if this is accurate? I've done some research which suggested that I shouldn't have paid the accrued interest in this case, but couldn't conclude with certainty.

appreciate your advise.

Hoenir

 Did you definately buy XD? The contract note should clarify.  If so go back to HL. 

OldScientist

The dirty price should drop by the amount of the coupon on the ex-dividend date since it is on that day that it is paid to the holder (although they don't receive it for 7 days) - in other words, the price you paid should have been close to the clean price - it might be worth checking this. There is a small amount of rebate interest too (see https://www.dmo.gov.uk/responsibilities/gilt-market/about-gilts  ).

According to trade web, on the 18th, the clean price was 83.98 and the dirty price 83.95 (negative accrued interest during this period) i.e., almost the same, while back on the 11th (last working day before ex-div), the clean price was 87.97 while the dirty price was 89.49 (i.e., dirty price much higher than clean price).

mrdarcy86

Hoenir said:

 Did you definately buy XD? The contract note should clarify.  If so go back to HL. 

Thanks, yes note says XD, I've raised it with HL waiting to hear back. Just trying to be sure whether I should have paid that accrued interest or not.

mrdarcy86

OldScientist said:

The dirty price should drop by the amount of the coupon on the ex-dividend date since it is on that day that it is paid to the holder (although they don't receive it for 7 days) - in other words, the price you paid should have been close to the clean price - it might be worth checking this. There is a small amount of rebate interest too (see https://www.dmo.gov.uk/responsibilities/gilt-market/about-gilts  ).

According to trade web, on the 18th, the clean price was 83.98 and the dirty price 83.95 (negative accrued interest during this period) i.e., almost the same, while back on the 11th (last working day before ex-div), the clean price was 87.97 while the dirty price was 89.49 (i.e., dirty price much higher than clean price).

Thanks for your reply. So on that dmo page, it says "If the investor is buying a gilt within the ex-dividend period, they are not entitled to the next interest payment and will pay accrued interest (as detailed above)."

Not sure if I'm missing something, but that reads to me that HL were correct to charge me the accrued interest?

This though would contradict the fact that dirty/clean were the same on the 18th, as per your reply.

Hoenir

mrdarcy86 said:

Hoenir said:

 Did you definately buy XD? The contract note should clarify.  If so go back to HL. 

Thanks, yes note says XD, I've raised it with HL waiting to hear back. Just trying to be sure whether I should have paid that accrued interest or not.

I did think of this earlier but only just been able to post. As your comment about May and October interest struck a chord. The interest should be half yearly April and October. The Gilt was only launched in May 2023. The initial period being less than a full 6 months. I'm wondering if this is what has caused the confusion. By whoever priced the trade. Wrong assumptions being made / input. 

From the prospectus 

11. Interest on the Gilt will accrue from 17 May 2023, the first issue date of the Gilt, and the short first interest payment will be due on 22 October 2023 at the rate of £1.726776 per £100 nominal of the Gilt.

mrdarcy86

Hoenir said:

mrdarcy86 said:

Hoenir said:

 Did you definately buy XD? The contract note should clarify.  If so go back to HL. 

Thanks, yes note says XD, I've raised it with HL waiting to hear back. Just trying to be sure whether I should have paid that accrued interest or not.

I did think of this earlier but only just been able to post. As your comment about May and October interest struck a chord. The interest should be half yearly April and October. The Gilt was only launched in May 2023. The initial period being less than a full 6 months. I'm wondering if this is what has caused the confusion. By whoever priced the trade. Wrong assumptions being made / input. 

From the prospectus 

11. Interest on the Gilt will accrue from 17 May 2023, the first issue date of the Gilt, and the short first interest payment will be due on 22 October 2023 at the rate of £1.726776 per £100 nominal of the Gilt.

Thanks again. It could have caused confusion, but it looks like in this case I was charged accrued interest for 156 days between May 17th and October 20th (Settlement date on the note.) 

So the fact it was XD made no difference in accrued interest calculation, and my understanding then ithat I've paid the bond seller his interest when I bought, but then there was another interest payment issued on the 23rd to them as well, since they would have been the bond holder on the 12th (XD)

Is it correct to assume that I have a claim here?

OldScientist

I wonder whether @Hoenir is right and the 'short' coupon has caused some confusion (it also struck me after I posted that the coupons for this gilt should be October and April).

Could you check what price you actually paid for the gilts? I note that you said 'spoke' in your original post (i.e., verbal?) - it will definitely be useful to get a written explanation (and calculation) from HL to see the source of confusion/error.

The transaction should be entirely fair to both parties - in other words, no-one should gain an advantage from the date on which a gilt is bought/sold (excluding changes in the market price) otherwise gilts would be illiquid for 7 working days when they went XD.

mrdarcy86

OldScientist said:

I wonder whether @Hoenir is right and the 'short' coupon has caused some confusion (it also struck me after I posted that the coupons for this gilt should be October and April).

Could you check what price you actually paid for the gilts? I note that you said 'spoke' in your original post (i.e., verbal?) - it will definitely be useful to get a written explanation (and calculation) from HL to see the source of confusion/error.

The transaction should be entirely fair to both parties - in other words, no-one should gain an advantage from the date on which a gilt is bought/sold (excluding changes in the market price) otherwise gilts would be illiquid for 7 working days when they went XD.

Yes I raised query with them on the phone, followed up with a secure message online, so waiting to hear back. I also noted that there's no mention of rebate interest, which I believe I would have been entitled to. 

That's the relevant details that I see on the note.

Treasury 4% 22/10/63 Gilt 156 Days Interest XD 84.629
Date: 18/10/2023
Settlement Date: 20/10/2023