Accrued Interest

In the case of almost all stocks1 and shares bought in this country the purchase-price includes the accrued dividend - that is, the proportion of dividend or interest that will have accrued from the date on which the last interest or dividend was paid up to the date on which the purchase takes place. For instance, in the case of a 4 per cent bond for £100, with interest payable on 1st January and 1st July, purchased at par (that is, £100) on 1st April, the purchaser receives on 1st July a dividend for six months, although he has only lain out of his capital for three months. The interest for the period from 1st January to the date of purchase, which he thus receives, is called accrued interest. In the case I have mentioned it amounts to £1, which forms in correct book-keeping a deduction from the price. The purchaser therefore pays really £99 instead of £100.

I have mentioned the items of brokerage, stamp duty, and accrued interest together, for although they affect the cost to the purchaser in different directions, they have all to be kept in view, and allowance has to be made for them when we calculate the rate of interest an investment will yield. In some cases, such as that of an ordinary perpetual stock, they do not modify the rate to any great extent; but if the investment is for a short period the difference they cause may be considerable.

Take the example I have just given, and assume that the purchaser pays £100 for a perpetual stock of the nominal amount of £100 yielding £4 per annum. Assume also that no stamp duty is exigible. If we deduct from the purchase-price the accrued interest of £1, which he will get on 1st July, and add thereto the brokerage of 10s. paid to the stockbroker, the net sum paid for the investment works out at £99, 10s., and the rate of interest which £4 yields thereon is £4, 0s. 5d. But if the investment is not perpetual, and is repayable at the end of, say, five years, the investor, in addition to receiving £4, 0s. 5d. per cent during the five years, is entitled to receive £100 at the end of that period, whereas he has only paid £99, 10s. The difference between these two sums - namely, 10s. - is practically additional interest earned by him, and if spread over the five years would amount to 2s. per annum, and would bring the rate of interest up to £4, 2s. 5d. This is an approximate calculation, but it is sufficiently accurate for all practical purposes. The exact rate under the conditions I have mentioned is £4, 2s. 3d. per cent.

1 The exceptions are railway debentures (not railway debenture stocks) and some three or four other investments.

In the example it was assumed that the price of £100 of nominal amount of stock was £100 - in other words, that it was bought at par; but as a matter of fact the bulk of purchases are made not at par, but either at a premium or at a discount. If stock is bought for less than the nominal amount, it is said to be bought at a discount; if for more than the nominal amount, it is bought at a premium. Thus North British Railway 3 per cent Debenture Stock is at a discount with the price at £95 for each £100 of stock, and was at a premium in 1898 when it was sold at £111.

The fact that a stock has been bought at a premium or at a discount has a very important effect on the rate of interest, and the distinction I have referred to between redeemable and irredeemable is still more important. Thus North British Railway Stock being perpetual, the rate of interest an investor would receive if he paid £95 (after making allowance for brokerage, stamp duty, and accrued interest) is £3, 3s. 2d. per cent, and is £2, 14s. Id. per cent if he paid £111.

If, on the other hand, the stock offered is a terminable one, the purchaser will have to spread over the number of years the investment has to run, any difference between the nominal amount to be received at maturity and the price he has to pay. The following examples of the approximate calculation of two stocks repayable in five years, the net prices of which are 95 and 105 respectively, - £100 being the sum due at the end of ten years in each case, - will show the effect on the rate of interest:-

These calculations are merely approximate, and do not make allowance for the effect of compound interest. The exact rates are £4, 12s. 6d. per cent and £3, 8s. 2d. per cent respectively.

"Ex Dividend" And "Cum Dividend"

These expressions are used in connection with the purchase of stock at a time when the dividend is falling due. If the stock is bought "ex dividend" the dividend is paid to the seller and not to the buyer; but if bought "cum dividend" it is paid to the buyer. In the case of a sale of Caledonian Railway Ordinary Stock made about the end of September, as this stock is marked "ex dividend" on and after 30th September, any purchase on the 29th would have been made "cum dividend," and the buyer would receive the half-year's dividend then due; but any purchase on 30th September or later would be made "ex dividend," and the seller would receive the dividend.

Trust Investments

It is important that you should fully understand the rules with reference to trust investments. In terms of (1) "The Trustee Act, 1893," for England and Ireland; and (2) "The Trusts (Scotland) Amendment Act of 1884," "The Trustee Act, 1893," for Scotland; and (3) "The Colonial Stock Act, 1900," for both countries, trustees may, unless expressly forbidden by the trust-deed, invest in certain specified securities. As you can understand, the fact of a stock being in the trustee investment list adds considerably to its value, especially if it is a trustee investment both in England and Scotland.