Accrued interest
The interest that has built up since the last coupon date and belongs to the seller. Bond prices are quoted clean, without it; the buyer pays the clean price plus accrued interest, and the total is sometimes called the dirty price.
Example
A clean price of 915.75, ninety days after an annual 40 coupon, carries accrued interest of 40 x 90/365 = 9.86, so the invoice is 925.61.
Important
It is a timing adjustment rather than a cost - the next full coupon returns it to you - but it is real cash on settlement day, and confusing the quote with the invoice is how a first bond purchase produces an unexplained shortfall.
Related terms
- Coupon — The periodic interest a bond pays, quoted as a percentage of par value rather than of the price. It is fixed by the contract at issue and does not change with the market.
- Bond — A loan made to a government, agency or company, packaged so it can be transferred to somebody else. It obliges the issuer to pay stated interest on stated dates and to repay a stated sum at maturity.
- Par value — The sum the issuer repays at maturity, per unit of the bond. Also called face value or principal. It is the base on which the coupon percentage is calculated.
Lessons that explain it
All 578 terms in the Investing glossary