What is an Accrued Interest Adjustment?

Accrued interest adjustment is an accounting adjustment to the taxable income charged to the purchase of a convertible bond or other convertible security instrument. Basically, a convertible instrument accrues interest as its held. This interest is paid out in coupon payments. If you purchase an instrument in between payments, the purchase will pay the seller the value of the accrued interest up until the date of purchase. As such, when the purchaser later receives the coupon payment, the amount previously paid to the seller is deducted (for tax purposes) from the amount of the coupon received by the buyer.

This adjustment makes certain that the purchaser of the convertible instrument does not pay taxes on the coupon (or interest) that was not hers.