Accrued Interest Meaning

If you look in the dictionary the meaning of accrue you will understand what is accrued interest. Accrue means accumulation or addition and accrued interest means accumulation of interest, this concept is of particular significance when one is buying or selling the bond or fixed income security.

If you are holding your bond till maturity than it is not an issue because you will be the owner of the bond till last date and therefore you will receive the interest, the problem comes when you sell your bond in between the last interest rate payment and future payment date. It can be better understood with the help of an example where one can see how the calculation is done for accrued ROI. Suppose you hold $1000 bond on which ROI is 10 percent per annum and you receive interest every 6 months which comes to $50 every 6 months, now if you sell your bond after 3 months than the buyer will pay you the price of bond and also three months interest which will be $25 ($50*3/6) because for three months you were the owner and therefore the interest was accrued for 3 months.

Above example was made with simple figures, the calculation for accrued interest can be much more complex and tricky in real life as there people buy and sell bonds on daily basis which makes the calculation quite complex.

0 comments… add one

Leave a Comment


Related pages


disadvantages of international tradeod loan meaningidentify the advantages and disadvantages of a command economyprepayments journal entryadvantages and disadvantages of premium pricingconglomerate diversification exampledisadvantages of online banking to customerswhat is substitution effectcompetition based pricing advantages and disadvantagesreceived advance payment journal entrycrossing chequeswhy is trial balance preparedsubstitutes and complements economicswhat is demand loanproduct bundling pricing examplewhat is a autocratic leadermarket penetration pricing examplehow to prepare fund flow statement with exampleadvantages federalismunearned rent revenue adjusting entryunearned revenue balance sheetstatutory liquidity ratio and cash reserve ratiocontingent liabilities examplesmerits of industrializationfeatures of monopoly in economicsurbanization disadvantagesadvantages and disadvantages of organizational structuredefine skimming pricingnormal vs inferior goodsasset vs liability definitionadvantages and disadvantages of chequesexamples of inelastic demand productsdifference between wholesaler and retailerelectronic clearing servicebills receivablebhell companydefinition of inferior goodsconservatism conceptunearned revenue accountinghow to fill out a bank withdrawal slipjournal entry for salary receivedjoint ventures advantages and disadvantagesnet worth calculation of companyadjusting entries for prepaid expensesskimming penetrationwhat does proprietors meandisadvantages of capitalist economydefinition of fixed deposit accountdefinition of complements in economicslocal bill discountingfeatures of autocratic leadershipsocialist economy advantagesillegal immigration disadvantagesadvantages of lifo methodtypes of elasticity of demand with diagramwhat is derivative marketdisadvantages of fdiproduct bundle pricing strategyadvantages and disadvantages of secured loansnormal goods examplesadvantages of hire purchase and leasingstrap option strategyhorizontal analysis of a balance sheetadvantages and disadvantages of working capitalsubvention meaningadvantages and disadvantages of payback methoddifference between trading account and demat accountdisadvantage of autocratic leadershipdisadvantages of stock dividendswhat does cross cheque meansreal world example of monopolistic competitionconservatism examplesprepaid journal entryskimming pricing strategy advantages and disadvantagesan example of deferred revenue is unearned rentfull form of rtgs in bankingforex reserve meaningwhat is journal entry for prepaid expensesfeatures of privatization