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What is Accrual Rate?

This term might apply to bonds or pensions and other financial instruments which build up interest value which is paid out at a later time.

Accrual Rate is the rate at which a nominal interest rate is credited to an account that will be paid out at a later time. A bond sold in the secondary market, for instance, will take the accrual rate into account if the sale takes place in between coupon payments.

The accrual rate is the nominal or coupon rate of the bond, basically, but is used to determine how much should be paid for a bond. The buyer must compensate the seller for the amount of interest accrued up to the point of the sale, because the bond will not pay out its regular coupon payment until the next scheduled time, which could be months down the road.

Accrual rate also applies to other financial instruments, such as pensions. Employee pensions have an accrual rate which is applied to the number of days or hours worked: for each day or hour worked, the accrual rate will determine how many days-worth of pension income will be paid into the employee’s pension fund. Vacation days and vacation pay may also have an accrual rate.

Keywords: bonds, secondary market, accrual accounting, coupon rate, defined benefit pension plan,