Accrued Interest
Accrued Interest is the coupon income a bond has earned between the last coupon date and today, but not yet paid out. When you buy a bond between coupon dates, you pay the seller the clean price plus accrued interest — because you'll collect the full
Accrued Interest is the coupon income a bond has earned between the last coupon date and today, but not yet paid out. When you buy a bond between coupon dates, you pay the seller the clean price plus accrued interest — because you'll collect the full next coupon and the seller deserves their share.
Worked INR example
A ₹10 lakh face-value NTPC bond pays a 7.5% annual coupon every 1st January. You buy on 1st April. Three months (91 days) of interest have accrued. Accrued interest = ₹10 lakh × 7.5% × 91/365 = ₹18,699. You pay clean price + ₹18,699 to the seller. On 1st January next year you collect the full ₹75,000 coupon.
When to use
- Secondary-market G-Sec purchases on NDS-OM where price quoted is "clean"
- Year-end MTM valuation of corporate-bond portfolios
- Computing capital gains separately from interest income for tax
SEBI / RBI caveat
For tax purposes, accrued interest paid at purchase is added to cost; interest received is taxed at slab rate as "income from other sources". This prevents double taxation. SEBI MF factsheets quote dirty NAV (includes accrued).
Related terms: Coupon Rate, YTM, Modified Duration.