DEFINITION of 'Accrued Interest Adjustment'

The extra amount of interest that is paid to the owner of a convertible bond or other fixed income security. The amount paid is equal to the balance of interest that has accrued since the last payment date of the bond.

At the time, the investor converts a convertible bond, there will usually be one last partial payment made to the bondholder to cover the amount that has accrued since the last payment date of record. Also, when buying bonds in the secondary market, the buyer will have to pay accrued interest to the seller as part of the total purchase price.

BREAKING DOWN 'Accrued Interest Adjustment'

The accrued interest adjustment is always taxable as ordinary interest. The amount of the accrued interest adjustment will always vary, according to the number of days that elapse between the last payment date of record and the date of conversion.

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