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Accrued Interest Bond – Definition

Accrued Interest (Bond) Definition

The accrued interest of a bond is the amount of interest earned on the bond but awaiting payment. This interest is accumulated from when a bond coupon is issued.

In bond trading, the buyer pays the seller the market price of the bond plus the accrued interest since this is the bond sale’s settlement price.

The settlement price, however, only occurs in the transaction belonging to the interest-bearing, coupon-paying bond.

Income bonds are exempted since they pay interest only when they are profitable.

The formula for calculating accrued interest is given below

Accrued interest = coupon rate expressed in decimal * interest period annual score * face value.

A Little More on What is Accrued Interest

If the bond is sold before the date of interest payment, then the seller does not own the interest. However, before this, the purchaser must first reimburse the seller accordingly for the holding time of the bond from the previous payment date to the settlement date.

Example of accrued interest

Assume an interest payment date is January 1and July 1 for a bond with a value of $100,000 and a 10% interest rate. If the bond were to be sold on March 1, the accrued interest would be $1,667. This amount is calculated using the formula as follows.

0.01 x 2/12 x $100,000 = $1,667

References for Accrued Interest

Academic Research on Accrued Interest

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