Accrued interest

Before you rely on it

What to check

Reconcile the settlement total against price times face value. The gap should match the days since the last coupon.

The common error

Where people go wrong with accrued interest

People see the larger number on the confirmation and think they were charged a fee. Then they compute yield off the dirty price and get an answer that is too low, because they have treated a reimbursement as a cost.

Worked through

Accrued interest in plain numbers

Take a bond with a $1,000 face value and a 6% coupon paid twice a year, so $30 every six months. You buy it 60 days after the last coupon date; many corporate bonds count 30 days to a month and 180 days to the half-year, so 60 of 180 days have gone by. Accrued interest is $30 × 60/180. That comes to $10.00. The screen shows a clean price of 98.00, or $980 per bond. You pay the seller $990. Four months later the issuer sends you the full $30. You keep $20 of it as your own, and the $10 you advanced comes home. Treasuries count actual calendar days, so the same trade there lands a few cents away from this figure.

Easily confused

Accrued interest and its neighbours

Accrued interest gets mixed up with the coupon, the current yield and the price itself; the coupon is the whole payment the issuer sends on a set date. Accrued interest is the slice of that payment earned so far, and it grows a little every day until the date arrives. Current yield divides the annual coupon by price and never mentions timing at all. Clean price leaves accrued interest out. Dirty price, also called the full price, adds it in. Quote screens show clean prices. Trade confirmations show the dirty one. Neither is wrong. They answer different questions, and confusing them is how a fair trade looks like an overcharge.

In real decisions

Where accrued interest turns up

You meet it the day you buy or sell a bond between payment dates; the trade ticket has a line for it, and the total looks bigger than the price times the quantity. Bond funds build it into their daily values without saying so; anyone comparing quotes from two dealers needs to check that both are clean or both are dirty. Tax reporting picks it up as well. Interest you paid a seller at purchase is normally netted against the coupon you receive later, and brokers print the figure on the year-end statement so the two can be matched. Portfolio software that ignores it will show a small phantom loss on every purchase.

Know the edges

Where accrued interest stops being reliable

The number depends on the day-count convention, and conventions differ by bond type; a corporate bond, a Treasury and a municipal can each count days their own way. The same coupon therefore accrues at slightly different speeds. Bonds in default stop accruing in any useful sense, and bonds that trade flat follow a different rule again. If a confirmation looks off by more than a few dollars per thousand, ask the broker which convention it applied before assuming an error; a calculator can show the standard case. Your actual settlement figure comes from the dealer.