Accrued interest

Bonds pay coupons on fixed dates, but interest builds up every day in between. Accrued interest is the part of the next coupon that has built up since the last payment date. When a bond changes hands between coupon dates, the buyer compensates the seller for this amount, because the buyer will receive the whole of the next coupon.

Why it matters

It explains why the amount you pay for a bond is often more than its quoted price. Prices are usually quoted “clean”, without accrued interest. What actually changes hands is the “dirty” or full price: the clean price plus accrued interest.

How to read it

• Clean price reflects market value; it moves with interest rates and credit views.
• Dirty price = clean price + accrued interest. It rises steadily between coupon dates and drops back on each coupon date.
• Day count. Market conventions decide how days are counted, for example actual/365 or 30/360. The bond’s terms specify which applies.

Common misconceptions

• “I overpaid for the bond.” The extra amount is accrued interest, which comes back to you when the next coupon is paid in full.
• “Accrued interest is extra return.” It is a timing adjustment between buyer and seller, not additional income.
• “It only matters to traders.” Anyone buying a bond between coupon dates pays it, so it affects the cash you need on the purchase date.

In India: Bond platforms usually show the clean price, accrued interest and total consideration separately on the order screen. The tax treatment of accrued interest on purchase and sale can be technical; check current provisions or consult a tax professional.