What Is Accrued Interest on a Bond?
Bonds don’t pay interest continuously into an account the way a savings balance might appear to. They pay on a fixed schedule, and that schedule creates a small accounting wrinkle whenever a bond changes hands between payment dates.
The short answer
Accrued interest is the interest that has built up on a bond since its last coupon payment but hasn’t been paid out yet. When a bond is bought between payment dates, the buyer typically pays the seller this accrued amount in addition to the bond’s price, and then collects the full coupon payment when it arrives.
Why it exists
Most bonds pay interest on a set schedule, often twice a year, rather than continuously. If a bond is sold partway through that schedule, the seller has technically earned interest for the days they held the bond since the last payment, but hasn’t actually received a check for it yet — that payment goes to whoever holds the bond on the next payment date. Without some adjustment, the seller would lose out on interest they rightfully earned, and the buyer would get a windfall for days they didn’t own the bond. Accrued interest fixes that imbalance.
How it works in practice
Say a bond pays interest twice a year and is sold roughly a third of the way between payment dates. The buyer pays the seller an amount reflecting that portion of the upcoming coupon payment, on top of the agreed price for the bond itself. When the next full coupon payment arrives, the buyer receives the entire amount, effectively being reimbursed for the accrued interest they fronted, plus earning the portion that accrued during their own holding period. The seller, in turn, is compensated for the days they held the bond even though they won’t be the one collecting the official coupon payment.
Clean price and dirty price
This is exactly the mechanism behind the distinction between a bond’s clean price and dirty price. The clean price is the bond’s quoted price without accrued interest included. The dirty price is what a buyer actually pays, once accrued interest is added on top. Bond listings typically show the clean price, which is one reason the actual cash required to complete a purchase can be a bit more than the quoted number suggests.
How it relates to other bond mechanics
- Coupon rate stays fixed. Accrued interest is calculated based on the bond’s coupon rate, which doesn’t change, even though the accrued dollar amount grows daily until the next payment date.
- It’s separate from price swings. Accrued interest is a predictable, mechanical calculation, unlike shifts in a bond’s market price, which move with rates and credit conditions as covered in par value versus market value.
- It resets after each payment. Once a coupon payment is made, accrued interest resets to zero and starts building again toward the next payment date.
A practical habit
Anyone evaluating a bond purchase benefits from checking whether a quoted price includes accrued interest or not, since the difference affects the actual amount of cash needed to complete the trade. It’s a small mechanical detail, but overlooking it can make a bond purchase cost more than expected, or make two bonds look less comparable than they actually are.