Accrued Interest

The accrued interest on a bond is the amount of interest that has been deemed to have accumulated on the bond, but which has not yet been paid. It is the amount of interest that would have been paid if interest was paid daily, but which has not become actually payable yet. As a simple example, suppose a £100 bond pays 10% interest annually, so a single £10 payment is made each year. Six months after an interest payment would be exactly half way between interest payments, so the accrued interest would be half the annual payment or £5. Three months after an interest payment, we would be a quarter of the way to the next payment, so the accrued interest would be a quarter of the payment or £2.50. Accrued interest is calculated using a days convention, which may differ from the actual times elapsed since and between interest payments. The most common reason for calculating the accrued interest is to calculate one of the clean price or the dirty price, given the other.