Accrued interest is the amount of interest currently due but not yet paid on a bond issue. The process of calculating the amount of interest accrued depends on identifying the number of days that have passed since the last disbursement of accrued interest to the owner of the bond. At the same time, it is important to know the rate of interest that is compounded at each schedule coupon date.
Understanding how to calculate accrued interest is important when a buyer is considering the purchase of an existing bond issue. The buyer will be responsible for paying the seller the purchase price of the bond plus any interest that has accrued between the disbursement of the last interest payment and the date of the sale to the new owner. In order to assure that the interest is calculated properly, knowing how the interest is compounded and if the bond pays interest on an annual or semiannual basis is extremely important.
As an example, if the bond has a value of $10,000.00 in US Dollars (USD) and has an interest rate of six percent that is paid semiannually, the buyer will pay the seller a total of $10,600.00 USD for the purchase. Assuming the current period is about to be completed. That figure will include both the purchase price and the amount of the upcoming interest payment that the seller would receive if he or she chose to hold on to the asset. The good news is the new owner will recoup that extra $600.00 USD as soon as the next semiannual period is completed.
When it comes to the taxes due on any interest payments associated with the bond issue, the seller will be responsible for any and all interest payments received on the bond, including any accrued interest paid by the buyer at the time of purchase. The new owner will become responsible for any payments on accrued interest that are generated after the date of purchase.
In addition to involving interest earned on bonds, accrued interest can also refer to the amount of interest that is accumulated on mortgages and other types of loans as of the current date. The borrower is responsible for paying interest as it accrues to the lender. In the event of an early payoff of the loan or mortgage, the borrower may ask the lender to calculate the total of the principle and the remaining interest due in order to determine how is needed to settle the debt.