Explain the concept of bond coupon accrual.

The concept of bond coupon accrual refers to the accumulation of interest on a bond over a specific period of time. When an investor purchases a bond, they are essentially lending money to the issuer (such as a government or corporation) in exchange for regular interest payments, known as coupon payments, and the return of the principal amount at maturity.

The coupon accrual period is the time between two consecutive coupon payment dates. During this period, interest on the bond is calculated based on the bond's face value (also known as par value) and the coupon rate, which is the fixed percentage of the face value that the issuer agrees to pay as interest.

For example, let's consider a bond with a face value of $1,000 and a coupon rate of 5%. If the bond pays semi-annual coupons, the coupon accrual period would be six months. During this period, the bondholder would earn interest equal to 5% of $1,000, which is $50. This interest amount is accrued or accumulated until the next coupon payment date.

At the end of the coupon accrual period, the accrued interest is added to the bondholder's account. The bondholder can either choose to reinvest this interest or receive it as cash. The process of accruing interest continues until the bond reaches its maturity date, at which point the final coupon payment is made, and the bondholder receives the principal amount.

In summary, bond coupon accrual is the process of accumulating interest on a bond between two consecutive coupon payment dates. It allows bondholders to earn regular income from their investment until the bond matures.