Accrued Interest
Key Highlights
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Accrued interest refers to the interest that has accumulated on a fixed-income security since the last interest payment date but has not yet been paid to the investor.
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Accrued interest is typically calculated based on coupon rate, face value of the security, number of days since the last coupon payment and applicable day count convention.
What is Accrued Interest?
Accrued Interest refers to the interest that has accumulated on a fixed-income security since the last interest payment date but has not yet been paid to the investor. It becomes relevant when a bond or debt instrument is bought or sold between coupon payment dates.
How Accrued Interest Works?
Fixed-income instruments such as bonds, debentures, and government securities pay interest at predefined intervals. When a security changes hands between two interest payment dates:
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The seller has earned interest for the period they held the security
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The buyer compensates the seller for this earned interest
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On the next coupon date, the buyer receives the full interest payment
Calculation of Accrued Interest
Accrued interest is typically calculated based on:
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Coupon rate
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Face value of the security
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Number of days since the last coupon payment
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Applicable day count convention (such as Actual/Actual or 30/360)
Why Accrued Interest Matters to Investors?
Understanding accrued interest helps investors:
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Accurately assess total purchase or sale value of bonds
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Avoid confusion between quoted price and settlement amount
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Better evaluate post-tax cash flows from fixed-income investments
FAQs
1. Is accrued interest paid separately from the bond price?
No. It is included in the settlement amount paid by the buyer to the seller.
2. Does accrued interest apply to all bonds?
It applies to coupon-bearing fixed-income securities. Zero-coupon bonds do not have accrued interest.
3. Who receives the interest on the next coupon date?
The investor holding the security on the record date receives the full coupon payment.
4. Is accrued interest taxable?
Yes. Accrued interest received by the seller is typically treated as interest income for tax purposes.
5. How is accrued interest shown in trade confirmations?
It is usually shown separately from the clean price, as part of the total settlement value.