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What are meant by Cum-interest and Ex-interest at the Time of Purchase and Sales of Investments ? Explain with illustrations.

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The Price of Interest Earning Securities in Stock / Share Market is Quoted by Two ways : 

(i) Cum-Interest Price : Cum-Interest Price Quotation Denotes that the Accrued Interest from the Preceding Interest Due Date to the Date of Transaction is included in the Quoted CumInterest Price . 

Example : Anand Purchased 8 % , 200 Government Securities of Rs 100 each at Rs 103 Cum-Interest Price on 1st June , 2016, the Interest on which is Payable on 1st April and 1st October every year. In this example, Cum-Interest Price of Rs 103 means that the Accrued Interest for Two Months from 1st April, 2016 to 1st June, 2016 is included in this Price. Anand (Purchaser) is to Pay 200 x Rs 103 = Rs 20,600 to Purchase 200, 8 % Government Securities . The Computed Cum-Interest Price Rs 20,600 represents Partly towards Cost of Security (Rs 20,333) and Partly for Two Months Accrued Interest thereon (Rs 267) . It should be remembered that the Interest for Full 6 Months will be Received by the Purchaser on the Next Due Date of Interest i.e. on 1st October, 2016 .

(ii) Ex-Interest Price : Ex-Interest Price indicates that the Accrued Interest from the Preceding Date of Interest Due to the Date of Transaction is Excluded (Not Included) in the Quoted ExInterest Price . In such a case, the Purchaser will have to Pay this much Amount of Accrued Interest in Addition to the Quoted Ex-Interest Price . 

Example : Prateek Purchased 400, 8 % Government Securities of  Rs 100 each @ Rs 102 Ex-Interest Price on 1st September , 2016. The Interest on these Securities is Payable by Government on 1st April and 1st October . In this example , Ex-Interest Price means that the Accrued Interest for Five Months (From 1st April , 2016 to 1st September , 2016) is NOT Included in the Quoted Price and therefore Prateek will have to Pay Accrued Interest for these Five Months also .On the Next Interest Due Date (i.e. On 1st October , 2016) the Purchaser will Received Interest for Full Period of Six Months on these Securities . 

That is why He is Required to Pay (400 x Rs 102 = Rs 40,800) PLUS 5 Months Accrued.

 

Thus for Purchase of 200 Government Securities Quoted at Ex-Interest Price , the Purchaser will be required to make Payment of (Rs 40,800 + Rs 1,333) = Rs 42,133 to the Seller .

Note : If the Purchase and Sale of Securities are made on the Due Date of Interest Itself , the Market Price is Considered to be the Actual Cost of Purchase or Sale of the Security and No Accrued Interest is Included or Excluded in the Quoted Price . 

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