Accrued Interest

Intermediate

Accrued interest is the interest that has built up on a bond, loan or deposit since the last interest payment, but has not yet been paid.

Bonds usually pay interest at set intervals, such as every six months, but they can be bought and sold on any day. When a bond is sold between payment dates, the buyer pays the seller the interest earned so far, because the buyer will receive the full next payment.

For example, a bond with a face value of 1,000 pays 5% a year in two payments of 25. If it is sold two months into a six-month period, the accrued interest is about 25 multiplied by 60 divided by 180, or about 8.33, which the buyer pays the seller on top of the bond’s price.

The exact calculation depends on the day-count convention used for the bond.

Accrued interest also applies to loans and deposits: interest builds up daily and is paid or charged at set intervals. In accounting, companies record accrued interest as an expense or income in the period it is earned, even if the cash is paid or received later.

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