Finance: What is Accrued Interest?

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.

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Transcript

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

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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

00:49

bond creeps closer to its next interest payment and over

00:53

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

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

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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

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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

01:39

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

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

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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