Understanding Accrued Interest on Bonds

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.

How Is Accrued Interest on Bonds Calculated?

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 interests?

You can view accrued coupons in different places on your platform: (Change the screenshots below if platform changes occur)

• Portfolio > Transactions > click on the Bonds transaction

• Portfolio > click on the button with [. . .] on the right end of the position > Position details

Please note that you will also have the estimated accrued interest on your transaction tickets before you validate the transactions.

• When opening a trade ticket for a bond trade, you are able to view any accrued interest before placing an order as shown below:

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

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Example

Example: Accrued Coupon Payments on the Secondary Market

Let’s say a Treasury bond has a face value of $1,000 and pays a 6% annual coupon, distributed semi-annually.

The last coupon payment was made on 31 March, and the next is due on 30 September, making the coupon period 183 days.

The coupon amount for each period is $30 (calculated as 6% ÷ 2 × $1,000).

If a trader purchases the bond on 31 May, 61 days will have passed since the last coupon payment. Using the actual/actual day-count convention, the accrued interest is calculated as:

$30 × (61 ÷ 183) = $10

The original bondholder is entitled to the interest earned during their holding period (31 March to 30 May), but because they sold the bond before the next coupon date, they won’t receive the $30 payment on 30 September.

Instead, the buyer pays the $10 accrued interest to the seller at the time of purchase. The buyer will then receive the full $30 coupon payment on 30 September — even though they only held the bond for part of the period — because they compensated the seller for their share of the interest.

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