Accrued interest - Financial definition
Concise definition of the term accrued interest
Accrued interest is interest which has accumulated and is due but not yet been paid or received.
Comprehensive definition of the term accrued interest
A bond can be bought or sold at any time but the issuer only pays interest on coupon payment dates. The frequency of these dates depends on the bond's characteristics, and is in most cases annually, semiannually or quarterly.
When a transaction on a bond occurs on a date between coupon payment dates, the buyer of the bond will pay the seller the value of the interest accrued since the bond's last coupon date and the value date of the purchase.
If he holds the bond until at least the next coupon date, he will receive the full coupon from the issuer, thus effectively cashing in the interest for the period during which he held the bond.
If he decides to sell the bond before that date, the buyer will pay him the accrued interest to the value date of the sale, and again the interest he will receive will cover the period during which he held the bond.
Example:
Let's consider a bond with a 4% coupon which detaches every 25th of April, the day-count base being Actual/Actual.
If the bond is sold with value date May 25th, the buyer will pay the seller accrued interest for the period between April 25th and May 25th, i.e. for 30 days.
The purchase price will thus include 4% x 30 / 365(366) = 0.3279%(0.3288%).
If the bond is sold with value date May 25th, the buyer will pay the seller accrued interest for the period between April 25th and May 25th, i.e. for 30 days.
The purchase price will thus include 4% x 30 / 365(366) = 0.3279%(0.3288%).