Accrued Interest

What Is Accrued Interest?

Accrued interest is interest that has built up on a bond or loan since the last payment date but has not yet been paid out or fully settled. The key idea is timing: interest can economically accumulate day by day even when cash only changes hands on scheduled payment dates.

It affects both pricing and cash accounting. In bond trading, it helps determine what the buyer owes the seller beyond the quoted clean price. In lending, it helps explain how much interest has built up between payments.

Key Takeaways

• Accrued interest is earned or owed before the next scheduled payment date arrives.
• It is common in bond markets and in ordinary loans.
• In secondary bond trading, the buyer usually compensates the seller for interest accrued since the last coupon date.
• In loans, accrued interest is the interest portion that has built up but has not yet been satisfied by the next payment.
• The concept is about timing and settlement, not about whether the instrument pays interest at all.

How Accrued Interest Works

Interest does not usually wait until the payment date to begin existing economically. It builds up over the days between payment dates. That means a bond can have a coupon schedule of only a few payments per year while still accumulating interest continuously between those dates. The same logic applies to many loans, where interest accrues daily even though the borrower pays monthly.

This is why accrued interest becomes especially important when the ownership or payment position changes mid-cycle.

Accrued Interest in Bonds

Suppose a coupon bond pays interest twice a year. If the bond is sold halfway between coupon dates, the seller has already earned part of the next coupon economically, even though the cash has not yet been paid. The buyer therefore usually pays the quoted bond price plus accrued interest so the seller is compensated fairly for the elapsed portion of the interest period.

This is one reason bond pricing often distinguishes between a clean price and the all-in amount actually exchanged at settlement.

Accrued Interest in Loans

In a loan, accrued interest is the interest that has built up on the outstanding balance since the last payment or settlement point. When the borrower makes the next payment, part of that payment usually satisfies the accrued interest before the rest reduces principal. That is why a borrower who pays less frequently or later than expected may see more of the payment consumed by interest first.

The concept therefore helps explain how timing affects loan economics even when the nominal rate stays the same.

How Accrued Interest Changes Settlement

Accrued interest changes what a buyer, seller, borrower, or lender actually owes at settlement. In bond markets, ignoring accrued interest can make the transaction price look misleadingly low or high. In lending, ignoring it can make a borrower misunderstand how much of a payment is going to principal.

That makes accrued interest a settlement and cash-flow concept, not just a textbook math term.

The Bottom Line

Accrued interest is interest that has built up on a bond or loan since the last payment date but has not yet been paid or fully settled. It affects settlement amounts, payment allocation, and the real economics of interest-bearing instruments between scheduled payment dates.