ESI: Dividends and Interest

A securities firm (which we refer to as OurCo) earns a return on its proprietary investments in stocks and bonds in a number of ways. The "buy low — sell high" approach is described in Inventory and Trading P&L.

The two other most common ways of earning a return are through stock dividends and coupon interest payments. A complete treatment includes not just the recognition of the P&L but also the management of the balance sheet (the more important item in fact) and the collection of the cash payments. It will be found that this in turn requires consideration of all positions in the security, including customer positions, fails, repurchase, and borrow/loan transactions.

We will address dividends and interest through the use of two securities issued by XYZ Corp.

Securities issued by XYZ Corp.

Type Symbol Description

Stock XYZ XYZ's common stock. It has a history of quarterly distributions.
Bond XYZ-7.2 Corporate bond, interest rate of 7.2% figured on a 30/360 day count convention. The bonds pay interest quarterly. Record date for our example is 5/30 with payment on 6/15.

Securities issued by XYZ Corp.
Type	Symbol	Description
Stock	XYZ	XYZ's common stock. It has a history of quarterly distributions.
Bond	XYZ-7.2	Corporate bond, interest rate of 7.2% figured on a 30/360 day count convention. The bonds pay interest quarterly. Record date for our example is 5/30 with payment on 6/15.

Though very different at the mechanical level, there are many similarities between interest and dividend management. The fundamental question is, how do the right parties end up getting paid the correct amount at the right time? This will prompt a second question, how are income and expense recognized?

The investments are discussed in detail in:

Dividends.
Coupon Interest.

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