ACI: what an investor needs to know about the accumulated coupon income on bonds

Income on bonds is most often paid in regular payments - coupons. To prevent the seller from losing partial coupon income when selling the bond on the secondary market,

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The most common type of debt securities on the stock exchange are coupon bonds   . Income on such bonds is paid in regular payments until maturity - coupons. If securities are to be sold on the secondary market, the concept of accumulated coupon income is used to determine their fair price.

Accumulated coupon income (ACI) is the part of the coupon amount in monetary terms, which has accumulated on the bond on a certain day after the payment of the previous coupon. When a bond is sold between coupon payments, the seller from the next owner receives the accumulated coupon income in proportion to each day of ownership.

ACI is applied in settlements on transactions of purchase/sale of coupon bonds. If the bond assumes regular coupon payment, then its full amount is received from the issuer by the bond owner at the time of the formation of the list (register) of holders. In order for the previous owner not to lose money on the coupon payment due to the fact that he sold it before the official payment from the issuer, the next holder at the time of purchase from his money pays him the coupon amount that has accumulated at the time of the transaction. When the buyer receives the full coupon from the issuer, he is actually returned the amount of AT that he paid to the previous owner. If the buyer decides to sell the bond without waiting for the coupon payment from the issuer  , then he will also receive ACI from the next buyer, and this ACI will also take into account the amount that he paid to the previous holder.

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The coupon on bonds is calculated daily: the coupon size is divided by the number of days between coupon payments (coupon duration). This number is the ACI for one day of paper ownership. Multiplying it by the number of days of ownership of the paper since the last coupon payment, we will see the amount of ACI that the seller will receive on the day of the transaction.

An example of how NCD works

On the bond, coupons in the amount of ₽35 are paid every 182 days. The investor sells the bond on the 65th day after the previous coupon payment. That is, he was the owner of the bond for 65 days and during this time the coupon income accumulated. The buyer of such a bond must pay the accumulated coupon income (ACI) to the seller during these days.

ACI will be: ₽35 / 182 × 65 = ₽12.5.

This money will be returned to the new owner of the bond when, after 117 days, he receives the full coupon income - ₽35.

How accumulated coupon income works. At the time of purchase in the secondary market, the buyer must pay the seller the market price + ACI (Photo: RBC)

The opportunity to receive ACI is often considered an advantage of a bond over a bank deposit, since, as a rule, if the deposit is closed before the agreed time, then the interest is recalculated at the minimum demand rate, in most cases it is 0.01%.

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Calculation of accumulated coupon income

ACI is calculated depending on the type of coupon rate.

Coupon rate types:

constant  - a bond with a constant coupon income has a single rate for all coupons for the entire period to maturity, which is known at the time of issue; fixed  - with a fixed income, coupon rates and the size of the coupon payment change according to the payment schedule. The amount of coupon payments on such securities, although it changes, is known until the end of their maturity; Variable  - A bond with a variable coupon rate has a coupon rate that varies according to predetermined conditions. As a rule, the coupon is fixed until the date of the offer, after which the interest rate is changed at the discretion of the issuer. At the same time, before the offer, the new interest rate is unknown, but after it is established, it is valid until the next offer; floating  — a bond with an indexed (floating) coupon rate is tied to a change in some indicative financial instrument over a certain period, for example, to the key rate of the Central Bank, the RUONIA rate and other external indicators. The specific coupon rate and its size, respectively, for bonds with a floating type of coupon rate can be known both a little in advance, for example, for the current coupon period (if the indicator is tied to a rate with a certain lag), and become known only a few days before the end of the coupon period.

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Depending on what data is available for a particular bond (its coupon rate, coupon size in monetary terms), various formulas are used to calculate ACI:

from the coupon rate; from the coupon amount; from the coupon rate effective on each date within the coupon period (for securities with a changing coupon rate within the coupon period). ACI for fixed and fixed rate bonds

For bonds with a constant and fixed coupon, the ACI of the coupon amount is calculated using the following formula:

For bonds with a constant coupon, the ACI is calculated from the coupon rate using the following formula:

Accordingly, with the beginning of each new coupon period, the amount of ACI will begin to accumulate in accordance with the same value for the entire period of paper circulation.

ACI for bonds with a variable or floating rate

If the coupon income is variable or floating, then more complex formulas are used to calculate the ACI.

Usually for bonds with a variable or floating rate at the beginning of the coupon period, it is already determined, as well as the size of the coupon that will be paid at the end of this period. Accordingly, the ACI can be calculated using the standard formula.

The investor should keep in mind that the ACI of this security in the next period may already be different due to the fact that the coupon rate will change. If he plans to resell the paper in subsequent coupon periods, then the ACI that he paid when buying the paper, for example, for 50 days, will differ in another period for the same 50 days.

If the coupon rate changes within the coupon period, then a special ACI calculation formula is used, which takes into account the coupon rate valid on each specific date within the coupon period.

In practice, an ordinary investor does not have to independently calculate ACI. There is no separate calculator for calculating the ACI only, since this indicator is necessary for the investor in conjunction with other metrics of a debt security to assess its profitability. In this regard, ACI is calculated in general bond calculators, for example, in the calculator of the Moscow Exchange or Cbonds.ru.

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Where to view ACI on bonds

The amount of accumulated coupon income is calculated daily and published, among other parameters, on the page of each bond on the settlement date on the exchange website.

Where to view ACI for a bond on the Moscow Exchange website (Photo: Screenshot from the Moscow Exchange website)

Also, ACI is mandatory indicated on the pages of each specific security in the trading applications of brokers and on specialized sites for searching and analyzing bonds, for example, RusBonds.ru, Cbonds.ru and Smart-lab.ru.

Where to view the ACI for a bond in the broker's app (Photo: Screenshot from the broker's mobile app)

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Taxes according to ACI

For the buyer of the bond who has paid the ACI, its amount will be considered an expense. For the seller who received the ACI, its amount is income. The income accumulated by the coupon is subject to personal income tax in accordance with the law. From January 1, 2021, income on all bonds, including government bonds, is taxed at 13% or 15% if income from securities transactions exceeds ₽5 million.

A broker is a tax agent for withholding tax from AIT, that is, the investor does not have to calculate and pay it on his own.

There is an important aspect of the tax withholding mechanics that the Bondholders Association (ABO) has noticed and since 2021 have been trying to encourage brokers to fix it. Most brokers operating on the market write off personal income tax in the amount of 13% of the total amount of coupon income at the time it is credited to the brokerage account, while expenses resulting from the payment of accumulated coupon income (ACI) are not deducted from this income. As a result, it is not the net financial result that was actually received that is taxed at the moment. Brokers at the end of the tax period, that is, after December 31, make a reconciliation and return the overpaid tax, but if it is important for an investor not to lose extra money during the year to pay tax on coupons that are not withdrawn from the brokerage account, then you should check with your broker,

When is the best time to buy bonds?

The importance of calculating ACI is due to the fact that in most markets bonds are traded at net prices (excluding ACI), and purchase and sale transactions are made at a dirty price (including ACI), that is, when a transaction is made, the price of a bond for a buyer consists of two components: market price and accumulated coupon income for the relevant period.

The dirty or full price of a bond is the market price + ACI (Photo: Screenshot from Rusbonds.ru)

At the same time, when calculating the real yield on a bond, it is logical to take into account all the costs incurred for paper, including ACI. Otherwise, this expense will not be reflected in the overall financial result.

What is the income of an investor in coupon bonds (Photo: RBC)

It is more profitable to buy bonds immediately after the coupon has been paid on them. Thus, the amount of ACI, which is usually added to the cost of the bond, will be minimal, which means that the expense is less, and the yield is higher.

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A person who issues securities. The issuer can be both an individual and a legal entity (companies, executive authorities or local governments). A debt security whose owner has the right to receive from the person who issued the bond its face value within a specified period. In addition, the bond implies the right of the owner to receive a percentage of its face value or other property rights. Bonds are the equivalent of a loan and are similar in principle to the lending process. Both governments and private companies can issue bonds.