ShmoopTube

Where Monty Python meets your 10th grade teacher.

Search Thousands of Shmoop Videos

Finance: What is Accrued Interest? 42 Views

Share It!

Description:

What is Accrued Interest? Most bonds pay interest on a fixed calendar schedule, which can be quarterly, bi-annually, or annually. The interest earned accrues from zero after each payment, until the next payment date. However, since they are tradeable, bonds that change hands in a transaction have earned a certain number of calendar days’ worth of interest for the prior owner before the date of the trade. As such, the new buyer of the bond must pay accrued interest, or the accumulated interest earned during that period, on top of the sale price of the bond.

Language:

English Language

Transcript

00:00
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

00:22
while street never sleeps right So even though a given
00:25
bond might pay forty bucks twice a year what happens
00:28
if you buy the bond midway through a semester period
00:32
Like let's say this particular bond has a coupon paying
00:35
eight percent a year So on a thousand dollars a
00:37
principle this bond pays eighty bucks a year in the
00:40
form of interest or forty bucks twice a year paid
00:43
on june thirtieth in december thirty first Well think about
00:46
the number's here on a monthly basis each month that
00:49
bond creeps closer to its next interest payment and over
00:53
the course of a year there are twelve creeps Different
00:56
creeps each month that goes by the bonds creep further
00:59
into the eighty dollars a year or eighty dollars per
01:02
twelve months or eight twelves of a bond payment each
01:05
month Well at eighty bucks a year despond pay six
01:09
Dollars and sixty seven cents a month in interest Yeah
01:12
we got the math there Yeah So let's say you
01:15
sell it halfway into its period Presumably the market price
01:18
would reflect the accrued interest on the bond or three
01:21
months worth of interest or three times that six sixty
01:24
seven figure or yes twenty bucks And that makes sense
01:27
right You've held that bond a quarter a quarter of
01:30
a year a quarter of a year's interest of eighty
01:33
boxes one fourth of eighty or yep twenty So yeah
01:37
the math works What do you know So the price
01:39
of the bond would creep upward to reflect that accrued
01:42
interest That is if you sold it on the exact
01:45
end of the quarter that thousand dollar bond which was
01:48
conveniently selling it exactly part The end of the last
01:51
payment Well that bond would likely sell in the market
01:54
place for about a thousand twenty dollars The buyer would
01:57
get a check for forty bucks just ninety days later
02:00
from the a company that issued the bond And well
02:02
they can take that forty dollars and reinvested in crude
02:06
oil How about that Now you've made old jed very
02:09
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
Full Transcript