Most bonds pay interest semi-annually, 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 semi-annual 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.

Semi-annual 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 360-day 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 30-day 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

 

Accrued Interest For Government Notes And Bonds

Related Articles
  1. Investing

    Simple Math for Fixed-Coupon Corporate Bonds

    A guide to help to understand the simple math behind fixed-coupon corporate bonds.
  2. Investing

    How Interest Rates Impact Bond Values

    The relationship between interest rates and bond prices can seem complicated. Here's how it works.
  3. Investing

    How Rising Interest Rates Impact Bond Portfolios

    A look at the impact that changing interest rates - rising or falling - have on bonds and what investors need to consider.
  4. Investing

    Corporate Bonds: Advantages and Disadvantages

    Corporate bonds can provide compelling returns, even in low-yield environments. But they are not without risk.
  5. Investing

    How To Evaluate Bond Performance

    Learn about how investors should evaluate bond performance. See how the maturity of a bond can impact its exposure to interest rate risk.
  6. Financial Advisor

    7 Questions to Consider Before Investing in Bonds

    There is a significant number of questions every investor, private or institutional, should consider before investing in bonds.
  7. Investing

    5 Reasons to Invest in Municipal Bonds When the Fed Hikes Rates

    Discover five reasons why investing in municipal bonds after the Fed hikes interest rates, and not before, can be a great way to boost investment income.
  8. Investing

    Six biggest bond risks

    Bonds can be a great tool to generate income, but investors need to be aware of the pitfalls and risks of holding corporate and/or government securities.
Trading Center