This section is from the book "Money And Investments", by Montgomery Rollins. Also available from Amazon: Money and Investments.

One of the most common expressions in connection with investment dealings, and one very frequently not clearly understood. Let us take, for example, a $1,000 bond bearing 4% interest, or, in other words, paying the holder $40 yearly. The interest is payable January 1st and July 1st, each year; $20 at each time. This interest will not be paid before it is due; that is, in the month of June the interest due July 1st cannot be collected; but, suppose Maria Jones had held the bond in her possession until the 1st of June, she would, therefore, be entitled to the interest upon her money at the rate of 4% annually from January 1st last, at which time she received the interest then due. Therefore, if Maria Jones wishes to sell this bond to Henry Drake at a price, say, of par and "accrued interest," she would receive from him $1,000 - the principal sum of the bond -and also the interest upon the $1,000 from January 1st to June 1st, or five months, at the rate of 4% per annum. Drake would, therefore, have paid to Maria Jones five months' interest, which he could not collect until the 1st of July, at which time he would collect not only the five months' interest paid Maria Jones, but the additional one month's interest, for the time which he had had his money invested; therefore, the amount of money paid to Maria Jones would not be lost by Drake, but would come back to him, together with his one month's interest, on July 1st.

This is the only method by which it is possible to sell any security upon other than interest dates, without loss of interest to the holder, except an additional price be placed directly upon the security at the time of its sale, equal to the interest which has "accrued" since the last interest payment. Most stocks are sold in this latter way. Bonds are ordinarily sold upon the various Stock Exchanges with "ac- . crued interest," except "defaulted" and "income bonds," which are sold without interest - or "flat," as it is called. Bonds were formerly sold "flat" upon the New York Exchange, which, at that time, resulted in a slight difference in the quotations as between that exchange and others, such as the Boston, Chicago and Philadelphia exchanges, where they were sold "with interest." "With interest," "and interest," or "interest added" are expressions, either of which is used in the same sense as "accrued interest." If a note is drawn payable " with interest " and no rate is mentioned, the legal rate of interest prevailing in the State where the note is made payable is understood.

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