What is accrued interest?
Accrued interest is the interest that has built up on a bond, loan, or other financial instrument since the last payment date but has not yet been paid.
In simple terms, it refers to interest that is already earned or owed, even though the actual payment will be made later.
Most financial instruments accumulate interest daily, even if payments are made monthly or at fixed intervals. This is why accrued interest is used, to reflect the real value of interest earned between payment dates.
How accrued interest works
Accrued interest increases over time based on how long a position is held.
If you hold a bond between two coupon dates, you are earning interest every day. If you sell the bond before the next payment, the buyer compensates you for the interest you have already earned.
This keeps the transaction fair for both parties.
Accrued interest in bonds
Accrued interest is widely used in bond trading.
When a bond is bought or sold between payment dates:
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The seller has already earned part of the interest
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The buyer will receive the full coupon later
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The buyer pays the seller the accrued interest at settlement
This amount is added to the quoted bond price.
Accrued interest formula
A commonly used formula is:
Accrued Interest = (Days since last payment ÷ Days in period) × Coupon payment
This calculates how much interest has accumulated based on time.
Simple example
Suppose a bond pays interest twice a year. If you sell it three months after the last payment, you have earned part of the next interest payout.
Since you held the bond for half of the period, you are entitled to half of the next interest payment. The buyer pays this as accrued interest.
Clean price vs dirty price
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Clean price: Clean price is the price without accrued interest.
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Dirty price: Dirty price is the total price, including accrued interest.
Traders usually look at clean prices, but the actual transaction uses the dirty price.
Why accrued interest matters
Accrued interest helps ensure that financial transactions are accurate and fair by:
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Compensating sellers for the time they held an asset.
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Reflecting the true value of a financial instrument.
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Allowing trading to happen smoothly between payment dates.
Without it, pricing would not reflect real earnings.
Risk Warning: Trading CFDs involves significant risk and may not be suitable for all investors. Losses can exceed your initial deposit. Please ensure you fully understand the risks involved before trading.
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