accounting Accounting, also known as accountancy, is the measurement, processing, and communication of financial and non financial information about economic entities such as businesses and corporations. Accounting, which has been called the "languag ...

accrued interests are generally computed and recorded at the end of a specific accounting period as adjusting journal entries used in accrual-based accounting. In

finance Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of f ...

, accrued interest is the

interest In finance and economics, interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distin ...

on a

bond Bond or bonds may refer to: Common meanings * Bond (finance), a type of debt security * Bail bond, a commercial third-party guarantor of surety bonds in the United States * Chemical bond, the attraction of atoms, ions or molecules to form chemical ...

loan In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that ...

that has accumulated since the principal

investment Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance, the purpose of investing is ...

, or since the previous

coupon In marketing, a coupon is a ticket or document that can be redeemed for a financial discount or rebate when purchasing a product. Customarily, coupons are issued by manufacturers of consumer packaged goods or by retailers, to be used in r ...

payment if there has been one already. For a type of obligation such as a

, interest is calculated and paid in set intervals (for instance annually or semi-annually). Ownership of bonds/loans can be transferred between different investors not just when coupons are paid, but at any time in-between coupons. Accrued interest addresses the problem regarding the ownership of the next coupon if the bond is sold in the period between coupons: Only the current owner can receive the coupon payment, but the investor who sold the bond must be compensated for the period of time for which he or she owned the bond. In other words, the previous owner must be paid the interest that accrued before the sale.

Formula

The primary formula for calculating the interest accrued in a given period is:

I_A = T \times P \times R

where

I_A

is the accrued interest,

T

is the fraction of the year,

P

is the principal, and

R

is the annualized interest rate.

T

is calculated as follows:

T = \frac

where

D_P

is the number of days in the period, and

D_Y

is the number of days in the year. The main variables that affect the calculation are the period between interest payments and the

day count convention In finance, a day count convention determines how interest accrues over time for a variety of investments, including bonds, notes, loans, mortgages, medium-term notes, swaps, and forward rate agreements (FRAs). This determines the number of days ...

used to determine the fraction of year, and the

date rolling Date or dates may refer to: * Date (fruit), the fruit of the date palm (''Phoenix dactylifera'') Social activity * Dating, a form of courtship involving social activity, with the aim of assessing a potential partner **Group dating *Play date, ...

convention in use. A compounding instrument adds the previously accrued interest to the principal each period, applying compound interest.

External links

What is Accrued Interest ? In Hindi

References

summary of the

London Stock Exchange London Stock Exchange (LSE) is a stock exchange in the City of London, England, United Kingdom. , the total market value of all companies trading on LSE was £3.9 trillion. Its current premises are situated in Paternoster Square close to St Pau ...

for bonds
What is accrued interest?
Definition for loans by peer-to-peer lender Funding Circle {{Authority control Interest Liability (financial accounting) Bond valuation Settlement (finance) :fr:Obligation (finance)#Cours et coupon couru