Accrued Interest

  

Categories: Tax, Accounting, Metrics

You invest in a bond that has an 8% coupon. It pays interest twice a year. A quarter of the year in (and half way to the first interest payment), your cat starts upchucking something blue, and you decide to take Miss Snuggles to the vet. To pay for it, you sell your bond. When selling your bond, you can tack on the 2% you would have earned so far in interest. Only a quarter of the year has passed, so a quarter of the annual 8 percent interest gets paid. That's the amount that has accrued.

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Finance: What is Accrued Interest?42 Views

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Finance allah shmoop What is a crude interest A crude

00:07

interest would be an investment holding in oil Black crude

00:11

texas t remember jed boy Howdy coming Listen to a

00:15

story about a man named about that Alright all good

00:18

but that's not what a crude interest is at all

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while street never sleeps right So even though a given

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bond might pay forty bucks twice a year what happens

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if you buy the bond midway through a semester period

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Like let's say this particular bond has a coupon paying

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eight percent a year So on a thousand dollars a

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principle this bond pays eighty bucks a year in the

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form of interest or forty bucks twice a year paid

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on june thirtieth in december thirty first Well think about

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the number's here on a monthly basis each month that

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bond creeps closer to its next interest payment and over

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the course of a year there are twelve creeps Different

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creeps each month that goes by the bonds creep further

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into the eighty dollars a year or eighty dollars per

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twelve months or eight twelves of a bond payment each

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month Well at eighty bucks a year despond pay six

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Dollars and sixty seven cents a month in interest Yeah

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we got the math there Yeah So let's say you

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sell it halfway into its period Presumably the market price

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would reflect the accrued interest on the bond or three

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months worth of interest or three times that six sixty

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seven figure or yes twenty bucks And that makes sense

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right You've held that bond a quarter a quarter of

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a year a quarter of a year's interest of eighty

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boxes one fourth of eighty or yep twenty So yeah

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the math works What do you know So the price

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of the bond would creep upward to reflect that accrued

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interest That is if you sold it on the exact

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end of the quarter that thousand dollar bond which was

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conveniently selling it exactly part The end of the last

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payment Well that bond would likely sell in the market

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place for about a thousand twenty dollars The buyer would

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get a check for forty bucks just ninety days later

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from the a company that issued the bond And well

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they can take that forty dollars and reinvested in crude

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oil How about that Now you've made old jed very

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proud So come and listen to a story about a

02:11

man named shmoop Poor rests A writer barely kept his

02:14

family fed and one day there was a site of 00:02:18.46 --> [endTime] web and well stuff happens

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