accrued interest

Accrued Interest

The interest that has accumulated on a bond since the last interest payment up to but not including the settlement date.

There are two methods for calculating accrued interest:
1) 360-day year method, used for corporate and municipal bonds.
2) 365-day year method, used for government bonds.

Investopedia Commentary

Accrued interest is added to the contract price of a bond transaction. Essentially accrued interest has been earned since the last coupon payment - but since the bond hasn't expired or the next payment is not yet due, the owner of the bond hasn't officially received the money. If he or she sells the bond, accrued interest is added to the sale price.

Related Links

Advanced Bond Concepts
Bond Basics Tutorial

See also: Accrual Accounting, Accrued Expense, Bond, Coupon, Interest, Settlement Date

accrued interest

Interest owed but not yet paid. Accrued interest is listed as a liability on corporate balance sheets. It is also added to the price at which bonds are traded. For example, if a 12% coupon bond is trading at $950 and the last record date for an interest payment was two months ago, the buyer must pay the seller $20 (two months' interest at 1% per month on $1,000 principal) in accrued interest in addition to the quoted price. This additional expense will be recovered when the new owner receives six months' interest after holding the bond only four months.