accrued interest

Accrued interest

Applies mainly to convertible securities. Interest that has accumulated between the most recent payment and the sale of a bond or other fixed-income security. At the time of sale, the buyer pays the seller the bond's price plus "accrued interest," calculated by multiplying the coupon rate by the fraction of the coupon period that has elapsed since the last payment. (If a bondholder receives $40 in coupon payments per bond semiannually and sells the bond one-quarter of the way into the coupon period, the buyer pays the seller $10 as the latter's proportion of interest earned.)

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accrued interest

Interest owed but not yet paid. Accrued interest is listed as a liability on corporate balance sheets. It is also added to the price at which bonds are traded. For example, if a 12% coupon bond is trading at $950 and the last record date for an interest payment was two months ago, the buyer must pay the seller $20 (two months' interest at 1% per month on $1,000 principal) in accrued interest in addition to the quoted price. This additional expense will be recovered when the new owner receives six months' interest after holding the bond only four months.

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Accrued interest. Accrued interest is the interest that accumulates on a fixed-income security between one interest payment and the next.

The amount is calculated by multiplying the coupon rate, also called the nominal interest rate, times the number of days since the previous interest payment.

Interest on most bonds and fixed-income securities is paid twice a year. On corporate and municipal bonds, interest is calculated on 30-day months and a 360-day year. For government bonds, interest is calculated on actual days and a 365-day year.

When you buy a bond or other fixed-income security, you pay the bond's price plus the accrued interest and receive the full amount of the next interest payment, which reimburses you for the accrued interest payment you made when you purchased the bond. Similarly, when you sell a bond, you receive the price of the bond, plus the amount of interest that has accrued since you received the last interest payment.

On a zero-coupon bond, interest accrues over the term of the bond but is paid in a lump sum when you redeem the bond for face value. However, unless you hold the bond in a tax-deferred or tax-exempt account, you owe income tax each year on the amount of interest that the government calculates you would have received, had it been paid.

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accrued interest

For every day that a loan remains unpaid by the borrower, it earns interest that must be paid to the lender.This process of earning interest with each passing day is called accrual, and the money earned is called accrued interest.It may not be payable until the first day of the next month,but it has already been fully earned by the lender. See also nonaccrual.

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Accrued Interest

Interest that is earned but not paid, adding to the amount owed.

For example, if the monthly interest due on a loan is $600 and the borrower pays only $500, $100 is added to the amount owed by the borrower. The $100 is the accrued interest. On a mortgage, accrued interest is usually referred to as Negative Amortization.

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Accrued Interest

What Does Accrued Interest Mean?

(1) A term used to describe an accrual accounting method when interest from a payable or a receivable has been recognized but not yet paid or received. Accrued interest occurs as a result of the difference in the timing of cash flows and the measurement of those cash flows. (2) The interest that has accumulated on a bond since the last interest payment up to but not including the settlement date.

Investopedia explains Accrued Interest

(1) An accrued interest receivable occurs when interest on an outstanding receivable has been earned by the company but has not been received yet. A loan to a customer for goods sold would result in interest being charged on the loan. If the loan is extended on October 1 and the lending company's year ends on December 31, there will be two months of accrued interest receivable recorded as interest revenue in the company's financial statements for the year. (2) Accrued interest is added to the contract price of a bond transaction, reflecting interest earned since the last coupon payment. Because the bond has not matured or the next payment is not yet due, the owner of the bond has not received the money officially. Therefore, when the bond is sold, the accrued interest is added to the sale price.

Related Terms:
• Accrual Accounting
• Accrued Expense
• Coupon
• Interest Rate
• Settlement Date

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Accrued Interest

Interest that has been earned but not yet paid or credited; for example, for a bond on which interest is paid seminanually, interest earned during the six-month period in between payment dates.