What Is Bond Accrued Interest?
Accrued interest is the coupon interest earned on a bond since its last payment date. When a bond is sold between coupon dates, the buyer pays the seller the bond's clean price plus accrued interest (together called the dirty price). The buyer then receives the full coupon on the next payment date, effectively recouping the accrued amount they paid. Accrued Interest = Face Value ร Coupon Rate ร (Days Elapsed รท 365).
For example, a $10,000 bond with a 5% coupon and 90 days since the last payment: $10,000 ร 5% ร 90/365 = $123.29 of accrued interest. The Actual/365 day-count convention is commonly used for US Treasury bonds. Corporate bonds often use the 30/360 convention instead.
Frequently Asked Questions
The seller held the bond during the accrual period and earned that interest. The buyer compensates the seller at purchase and then receives the full coupon on the next payment date, making both parties whole.
Clean price is the quoted bond price excluding accrued interest. Dirty price (full price) = Clean price + Accrued interest. Transactions settle at the dirty price.