Accrued Interest of Bonds

An accrued interest is the interest that is owed but not yet paid, added to the price of the bond. Although bonds earn daily interests, the issuer of the bonds pays interests only once or twice a year. Therefore, if a bond is bought during dates in which interests are being paid, the buyer owes the seller the accrued interest for the amount of days of ownership. Then, the amount of the accrued interest is added to the price of purchase of the bond. The accrued is stated separately on the confirmation statement the brokerage firm sends when the bonds are bought and sold.

The following example illustrates how accrued interest is estimated. Shaun bought a bond with a coupon of 6% payable annually on June 30. He purchased the bond on December 31 of the preceding year. How much must he pay the seller in accrued interest? Jason owes the seller for the interest accrued from July 1 to December 31 (six months of the previous year):

Accrued interest = Length time the seller owned the bond before interest is                Paid per coupon = 6/12 x $60 = $30

Bonds that are in default and are no longer paying interest are said to negotiate flat. Flat bonds do not negotiate with accrued interest and in the bond quotes in the financial pages of the newspapers have an F next to the bond meaning that is negotiating flat.

Beginner Money Investing The Purchasing Process of Bonds Accrued Interest