Accrued Interest

Settlement - Accrued Interest

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Most bonds pay interest every six months or semi-annual. The interest is paid to par and divided into 2 payments. If you own a 00 bond at 7%, that means per year - divided into payments. Accrued interest occurs when the bond is sold in the secondary market.

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Settlement

Definition

Accrued interest is the back interest owed to the seeder of a bond since his last valid pay date.

This whole does not follow the price or value of the bond. It is plainly added onto the proceeds for the purchaser, and the seeder will get that back. The accrued whole will be larger if the bond is being sold right before an additional one interest pay date. Meaning, a bond that last paid on June 1st is not due to get paid again until December 1st, so if a bond is being sold in November - it will have roughly 5 months of interest that is owed.

Types of bonds and how interest is accrued

Us Government securities like Treasury Bonds and Treasury Notes imagine interest differently than Municipal or Corporate Bonds. Treasury Bills do not pay any interest, so there is no accruing with those. Government securities imagine interest based on actual days in a given month. Basically, they go off of a quarterly calendar year (365 days). You may think that is the normal way of paying interest, but most bonds do not pay that way.

Corporate and municipal bonds pay based on 30 day months or 360 day year. This means all months are treated the same. January is 30 days, February is 30 days, etc. This will follow accrued interest amounts and the calculation of days owed and money owed to the seller.

Calculation

Accrued interest payments are calculated from the last pay date (including that date), up to but not along with community date. The seeder does not receive interest for the selling community date. The community means the buyer has officially taken over and thus - he or she begins earning from there.

Settlement

Us Government securities conclude "T+1", which means trade date plus 1 firm day. If you buy a treasury note on Monday, it will conclude on Tuesday. Municipal and corporate bonds conclude T+3, trade date plus 3 firm days. This is carefully quarterly way community for both types. If the community duration runs into a major holiday (Christmas Day, July 4th, etc), there will be an extra day added to the community time.

Example

Using a corporate bond as an example, we can form out the accrued interest whole for this issue.

A ,000 6% corporate bond pays interest every March 1st and October 1st. The investor sells the bond on Thursday January 10th for quarterly way settlement. How many days of accrued interest is owed? Feel free to form this out before looking...

Ok, the way we imagine the accrued interest here is we have to see when the bond was sold and look at the last pay date from it. The bond is being sold on January 10th, so the last pay date is October 1st. This is a corporate bond, so each month is treated as 30 days. 30 days are owed for October, 30 for November and 30 for December = 90 days. Then we have to form out January. Since the bond is being sold (trade date) on Thursday January 10th, it will conclude on Tuesday January 15th. No, it does not conclude January 13th (even though it may look like it at first glance). The 3rd firm day from Thursday January 10th is the following Tuesday January 15th. That is 3 firm days for accrued interest purposes.

Do not include the community date itself. The days owed for January is 14 days. Thus, the final acknowledge to the above interrogate is 104 days total of accrued interest.

As I mentioned, accrued interest on bonds is not an speculation factor indicator. It is only a part of the bond trading scene and part of the community process.

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