
Brokerage Office Procedure  Accrued Interest
Most bonds pay interest semiannually, based on their maturity date. An investor who wishes to sell a bond between the interest payment dates will be owed the interest that has become due or that has accrued during their holding period. Investors who purchase the bonds between interest payment dates will receive the full semiannual interest payment on the bond’s next interest payment date. As a result, the purchaser of the bonds must pay the seller the portion of the interest payment that they earned, known as accrued interest. Most bonds trade with accrued interest also known as “and interest”.
There are only two dates during the month that a bond may pay interest they are the 1st and the 15th of the month. Interest on a new issue of bonds begins to accrue on the dated date. It is no unusual for an investor who purchases a new issue of debt securities to owe accrued interest to the issuer for bonds that are delivered after the dated date.
Semiannual interest payments may be made on the 1st or 15th of the following months:
January & July 
February & August 
March & September 
April & October 
May & November 
June & December 
Calculating Accrued interest
Interest on all bonds accrues from the last interest payment date up to, but not including, the settlement date. Accrued interest calculations for corporate and municipal securities use a 360day year in which all months contain 30 days. To determine the amount of accrued interest due or owed use the following formula:
Principal X Rate X Time
(Principal X Interest Rate) X (Number of days / 360) = Accrued interest
Example:
An investor purchases 10M XYZ J & J 8% corporate bond on Monday April 1st for regular way settlement. How much accrued interest will the investor owe?
(10,000 x 8%) X (93 /360) =
800 X .2583 = $206.67
To determine the number of days in the above calculation we used 30day month as follows:
January 
30 days 
February 
30 days 
March 
30 days 
April 
3 days 
Total 
93 days 
Note: Interest accrues up to, but not including, settlement date. The trade was done on Monday the first so interest accrued up to Wednesday April 3rd. On Thursday April 4th the trade will settle and the buyer will begin earning their own interest. If the trade had been executed on Friday April 1st the calculation would look like this:
(10,000 x 8%) X (95 /360) =
800 X .2634 = $211.11
Interest continues to accrue on weekends even though weekends are not good settlement dates.
January 
30 days 
February 
30 days 
March 
30 days 
April 
5 days 
Total 
95 days 
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