How To Calculate Accrued Interest On A Bond

Accrued Interest Formula:

\[ \text{Accrued Interest} = (\text{Coupon Rate} \times \text{Face Value}) \times \frac{\text{Days}}{\text{Period}} \]

Coupon Rate:

decimal (e.g. 0.05 for 5%)

Face Value:

currency

Days Accrued:

days

Coupon Period:

days (typically 365 or 360)

Accrued Interest:

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1. What is Accrued Interest?

Accrued interest is the interest that has accumulated on a bond since the last coupon payment date but has not yet been paid to the bondholder. It represents the earned interest that will be paid to the seller when the bond is traded between coupon payment dates.

2. How Does the Calculator Work?

The calculator uses the accrued interest formula:

\[ \text{Accrued Interest} = (\text{Coupon Rate} \times \text{Face Value}) \times \frac{\text{Days}}{\text{Period}} \]

Where:

\( \text{Coupon Rate} \) — Annual coupon rate (in decimal form)
\( \text{Face Value} \) — Par value of the bond
\( \text{Days} \) — Number of days since last coupon payment
\( \text{Period} \) — Total days in coupon period (typically 365 or 360)

Explanation: The formula calculates the portion of the next coupon payment that has been earned based on the time elapsed since the last payment.

3. Importance of Accrued Interest Calculation

Details: Accrued interest is important for bond trading as it ensures the seller receives compensation for the interest earned during their holding period. It's also crucial for accurate financial reporting and tax calculations.

4. Using the Calculator

Tips: Enter the annual coupon rate as a decimal (e.g., 0.05 for 5%), the bond's face value, the number of days since the last coupon payment, and the total days in the coupon period (typically 365 for annual coupons).

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between 365-day and 360-day convention?
A: The 360-day convention (banking method) assumes 30-day months, while 365 uses actual days. Corporate bonds typically use 365, while money markets often use 360.

Q2: How is accrued interest handled at bond settlement?
A: The buyer pays the seller the bond's price plus accrued interest. The buyer then receives the full coupon at the next payment date.

Q3: Does accrued interest apply to zero-coupon bonds?
A: No, zero-coupon bonds don't make periodic interest payments, so there's no accrued interest to calculate.

Q4: How do you calculate days accrued for different day count conventions?
A: Actual/actual counts actual days, 30/360 assumes 30-day months, and actual/360 uses actual days but 360-day year.

Q5: Why is accrued interest important for bond pricing?
A: It ensures fair compensation between buyer and seller for the interest earned during the holding period.