Accrued Interest

Definition - What does Accrued Interest mean?

Accrued Interest is the portion of a debt securities future interest payment, which has been earned by the seller of the security. The purchaser must pay this amount of accrued interest to the seller at the time of the transaction’s settlement. Interest accrues from the date of the last interest payment date up to, but not including, the transaction’s settlement date.

Testopedia explains Accrued Interest

Interest on a bond accrues daily and is paid to the bondholder on a semiannual basis. When a customer buys a bond in the secondary market the seller may owe the buyer accrued interest on the bond.

Ex: A customer buys one J&J corporate bond on Tuesday Aug 17.
The bond pays interest on Jan 1 and July 1, and corporate bonds assume that each month has 30 days and there are 360 days in a year.
The bond last paid interest on July 1, so the seller owes 30 days for July.
The bond trade will settle on Aug 20, so the seller owes an additional 19 days for Aug.
Therefore, the seller owes the buyer a total of 49 days worth of accrued interest when the trade is settled.

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