Accrued interest is the interest that has accumulated on a bond since the last day interest was paid. Interest continues to accrue between the date of your bond purchase and the settlement date, which is typically three days later. So, if you buy a bond on December 10 and the settlement date is December 13, the accrued interest will include December 11 and 12. Making the calculation is not complicated. For the purposes of this discussion, assume you are buying a corporate bond with a $1,000 par value at a coupon rate of 6 percent.
Find the coupon, or interest, payment amount. The interest payment on a bond is typically paid twice each year. A bond with a $1,000 par value at a coupon rate of 6 percent would pay $60 per year. So, every six months the coupon payment amount would be $30.
Get the last coupon, or interest payment, date. In this example, the last coupon date is September 10.
Tally the number of days between the last coupon payment and your anticipated settlement date. For example, if you plan to purchase a bond on November 7, your settlement date is typically November 10 for corporate bonds. The number of days between September 10 and November 10 is 60.
Calculate the total number of days in the interest period according to the 30/360 convention. (The 30/360 convention assumes that each month has 30 days and that each year consists of 360 days.) As most bonds pay interest semi-annually, the number of days in the interest period is 6 months times 30 days per month, which equals 180.
Calculate the accrued interest by dividing the number of days between the settlement date and the last coupon payment by the total number of days in the interest period and multiplying the result by the coupon payment amount.
In this example, divide 60 by 180 to arrive at 1/3, or 66.7 percent Multiply 0.667 by the coupon payment amount, which is $30. The accrued interest on the bond is $20.
The settlement date for most government bonds is just one day after the transaction date.
Purchasing a bond between interest dates may trigger tax consequences. Consult a qualified financial adviser or tax professional for up-to-date information.
- The settlement date for most government bonds is just one day after the transaction date.
- Purchasing a bond between interest dates may trigger tax consequences. Consult a qualified financial adviser or tax professional for up-to-date information.
D. Laverne O'Neal, an Ivy League graduate, published her first article in 1997. A former theater, dance and music critic for such publications as the "Oakland Tribune" and Gannett Newspapers, she started her Web-writing career during the dot-com heyday. O'Neal also translates and edits French and Spanish. Her strongest interests are the performing arts, design, food, health, personal finance and personal growth.