Accrued Interest

Definition of 'Accrued Interest'

In general, when traded, interest on bonds is separated from the underlying principal or price of the bond. When a bargain is transacted, the purchaser not only buys the underlying bond, but also the right to the next coupon payment, including the interest due for the period before the bond was purchased. In order to compensate the seller for this interest built up until the bargain date, the purchaser pays over an extra amount equivalent to the accrued interest, ie, the amount of interest due from the last coupon date to the time of purchase. Gilts and domestic bonds calculate using a 365–day year, whilst eurobonds usually assume a 360–day year. With the advent of the EURO, there is a move towards these conventions across Europe.

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