Accrued interest rate - Financial definition
Concise definition of the term accrued interest rate
The accrued interest rate is the amount of interest that has accumulated on a bond or other fixed-income security since the last interest payment up to the current date. It represents the interest earned but not yet paid to the bondholder.
Comprehensive definition of the term accrued interest rate
In the broader context of fixed-income securities, the accrued interest rate is critical for calculating the total amount payable when a bond is bought or sold between interest payment dates. For instance, when an investor purchases a bond in the secondary market, they must pay the seller the bond's price plus the accrued interest to compensate for the interest earned up to the purchase date.
This practice ensures fair compensation and is standard in bond markets. Accrued interest is also important in financial reporting and tax calculations, as it affects the recognition of interest income and expense. Practical examples include treasury bonds, corporate bonds, and municipal bonds, where understanding accrued interest is essential for accurate pricing and transaction settlement.