Accrued Interest

What is Accrued Interest?

 

Accrued interest is the fraction of the coupon payment that the bond seller earns for holding the bond for a period of time between bond payments. The bond price's inclusion of any interest accrued since the last payment period determines whether the bond's price is "dirty" or "clean." Dirty bond prices include any accrued interest that has accumulated since the last coupon payment while clean bond prices do not. In newspapers, the bond prices quoted are often clean prices.

However, because many of the bonds traded in the secondary market are often traded in between coupon payment dates, the bond seller must be compensated for the portion of the coupon payment he or she earns for holding the bond since the last payment. The amount of the coupon payment that the buyer should receive is the coupon payment minus accrued interest.

Accrued Interest Formula
Accrued Interest = BV* Interest period  *
[days between settlement and last coupon payment]
Total days in period
Variables
BV= Bond Value, or par value
Interest period  = the coupon rate for the period and it equals annual coupon rate divided by number of periods in a year
*days between settlement and last coupon payment divided by total days in the payment period. It depends on the day count convention of the bond.