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Accrued interest calculation
Fixed Income Technicals
Learning Outcome
5
Calculate accrued interest over time.
4
Differentiate clean and dirty prices.
3
Relate accrued interest to coupon dates.
2
Learn why interest accrues between coupons.
1
Understand accrued interest in bonds.
What is Accrued Interest?
Accrued Interest (AI) is the interest that has accumulated on a bond from the last coupon payment date up to, but not including, the settlement date of a trade. It represents interest that has been earned but not yet paid out.
📌 Clean Price (Quoted Price):
The price of the bond excluding accrued interest. This is what you see on Bloomberg or exchange terminals.
Clean Price = Dirty Price - Accrued Interest
📌 Dirty Price (Invoice / Settlement Price):
The actual amount the buyer pays. It includes both the clean price and the accrued interest.
Dirty Price = Clean Price + Accrued Interest
The Accrued Interest Formula
The standard formula for calculating accrued interest is:
|
Accrued Interest Formula AI = Face Value × Coupon Rate × (Days Accrued ÷ Day Count Basis) |
Worked Example
Given Information
|
Face Value |
₹ 1,00,000 |
|
Coupon Rate |
9% per annum |
|
Coupon Frequency |
Semi-annual (every 6 months) |
|
Last Coupon Date |
1 January 2025 |
|
Settlement Date |
1 March 2025 |
|
Day Count Convention |
Actual/365 |
Step-by-Step Calculation
Step 1: Days Accrued = 1 Jan 2025 to 1 Mar 2025 = 59 days
Step 2: AI = ₹1,00,000 × 9% × (59 ÷ 365)
Step 3: AI = ₹1,00,000 × 0.09 × 0.16164
|
Accrued Interest = ₹ 1,454.79 |
Summary
5
Dirty Price = Clean Price + Accrued Interest.
4
Accrued interest increases daily until the next coupon payment.
3
Bond buyers compensate sellers for accrued interest.
2
It is calculated from the last coupon date to the current date.
1
Accrued interest is the interest earned but not yet paid.
Quiz
Accrued interest is calculated from:
A. Bond issue date
B. Maturity date
C. Last coupon date till current date
D. Next coupon date
Quiz-Answer
Accrued interest is calculated from:
A. Bond issue date
B. Maturity date
C. Last coupon date till current date
D. Next coupon date
Fixed Income Portfolio Strategy - Accrued interest calculation
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