What is accrued interest on a bond?

‍Accrued interest on bonds refers to the interest that has accumulated since the last coupon payment, but has not yet been paid to the bondholder.

When buying bonds on the secondary market, the buyer must compensate the seller for this accrued interest. It is added to the total transaction cost and is paid in addition to the bond's market price.

The secondary market is where investors buy and sell previously issued bonds, as opposed to the primary market, where bonds are initially issued by governments, corporations, or other entities.

How Are Coupon Payments Distributed on Bonds with Accrued Interest?

Only the registered bondholder at the time of the coupon payment is eligible to receive it.

However, if the bond was sold before the coupon date, the previous owner is entitled to compensation for the interest that accrued during the time they held the bond.

In other words, while the new holder will receive the full coupon payment, the seller receives accrued interest from the buyer at the time of sale, representing their share of the coupon for the holding period.

Coupon interest is the return an investor earns for lending money to the bond issuer. This loaned amount is called the principal, and it is repaid to the bondholder at maturity. If the bond is sold before maturity, the seller receives its market value, and the new buyer becomes entitled to future interest payments and the principal at maturity.

The accrued interest adjustment ensures that the seller is paid for the portion of the coupon interest they earned before selling the bond. This amount equals the interest accumulated from the last payment date up to the settlement date.

Accrued interest (AI) is calculated using the following formula: AI = (t / T) × PMT, where:

• AI = Accrued interest
• t = Number of days since the last coupon payment
• T = Total number of days in the current coupon period
• PMT = Coupon payment for the period

There are two standard methods for calculating the day count:

1. Actual/Actual: Uses the actual number of days in the coupon period and the actual number of days in the year. Commonly used for U.S. Treasury bonds and bills.
2. 30/360 Convention: Assumes each month has 30 days and the year has 360 days. Typically used for corporate bonds.

Where can I view accrued interest?

You can view accrued coupons in the Edge trading environment. Go to Portfolio > Transactions > click on the Bonds transaction, or Portfolio > Position details.‍

When opening a trade ticket for a bond trade, you are also able to view any accrued interest before placing an order.

When opening a trade to buy bonds, you pay the Market value, Accrued interest and Trade fees.