Meaning of accured interest.

In finance, Accrued Interest is the interest that has accumulated since the principal investment, or since the previous interest payment if there has been one already. For a financial instrument such as a bond, interest is calculated and paid in set intervals. Accrued income is an income which has been accumulated or accrued irrespective to actual receipt, which means event occurred but cash not yet received.


Accrued interest is added to the contract price of a bond transaction. Accrued interest is that which has been earned since the last coupon payment. Because the bond hasn't expired or the next payment is not yet due, the owner of the bond hasn't officially received the money. If he or she sells the bond, accrued interest is added to the sale price


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


IA = T x P x R

where,
IA - 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 = DP/DY

where, DP is the number of days in the period, and DY is the number of days in the year.

The major issue with the accrual of interest is the day convention used. Generally, a 30-day month and a 360-day year is used for corporate and municipal bonds whereas it is based on actual calendar days for Government bonds.


The main variables that affect the calculation are the period between interest payments and the day count convention used to determine the fraction of year, and the date rolling convention in use.

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


Accrued interest is basically an accounting phenomenon which occurs due to the difference in timing of cash flows and the recognition of interest. This can be commonly seen in bonds, as they pay interest after a fixed interval say, six months whereas the interest is accrued on a day-to-day basis.


Example:-

Assume a bond with face value of Rs. 100 and interest rate of 10% pays semi-annual interest payments.

Now, after 3 months,

Accrued interest = 100 x (10%/2) x (3/6) = Rs. 2.5
 
In finance, Accrued Interest is the interest that has accumulated since the principal investment, or since the previous interest payment if there has been one already. For a financial instrument such as a bond, interest is calculated and paid in set intervals. Accrued income is an income which has been accumulated or accrued irrespective to actual receipt, which means event occurred but cash not yet received.


Accrued interest is added to the contract price of a bond transaction. Accrued interest is that which has been earned since the last coupon payment. Because the bond hasn't expired or the next payment is not yet due, the owner of the bond hasn't officially received the money. If he or she sells the bond, accrued interest is added to the sale price


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


IA = T x P x R

where,
IA - 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 = DP/DY

where, DP is the number of days in the period, and DY is the number of days in the year.

The major issue with the accrual of interest is the day convention used. Generally, a 30-day month and a 360-day year is used for corporate and municipal bonds whereas it is based on actual calendar days for Government bonds.


The main variables that affect the calculation are the period between interest payments and the day count convention used to determine the fraction of year, and the date rolling convention in use.

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


Accrued interest is basically an accounting phenomenon which occurs due to the difference in timing of cash flows and the recognition of interest. This can be commonly seen in bonds, as they pay interest after a fixed interval say, six months whereas the interest is accrued on a day-to-day basis.


Example:-

Assume a bond with face value of Rs. 100 and interest rate of 10% pays semi-annual interest payments.

Now, after 3 months,

Accrued interest = 100 x (10%/2) x (3/6) = Rs. 2.5

Hey friend, many thanks for sharing such an important article about the accrued interest and i am sure it would help many people. BTW, i have also got some important information and would like to share it with you to add more value to your thread.
 

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