HANDLING ACCRUED INTEREST WHEN BONDS ARE TRADED

Since corporate bonds generally pay interest at regular intervals, the seller of a bond may have some interest coming at the date of the settlement.  If the bond pays interest semi-annually, for example, and the trade takes place three months before the next payment date, the seller is entitled to three months' interest on the bond.

The bond seller receives the interest that has accrued—or accumulated—since the most recent interest payment from the buyer at the settlement.  The buyer pays this accrued interest to the seller in addition to the price of the bond.  The formula used to calculate the amount of accrued interest that the buyer must pay is:

Say that an investor is selling a $1,000 bond earning interest of 10 percent, or $100, annually, paid out in two semi-annual payments in March and September.  If the investor sells the bond in June, the accrued interest is:

While the accrued interest seldom works out to a whole number as neatly as in this scenario, the calculation is not difficult.

Bond trading is not as simple as trading baseball cards, yet most investors can easily master its details.