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What is Accrued Interest?

Accrued Interest applies to a bond or loan, accounting for the interest that is calculated per diem for the time between payments.

Accrued Interest is the amount of interest that has "built up" between the last payment and the present, with regards to bonds and loans. If a bond is sold from one person to another, and the corporation or municipality that issued the bond pays out an interest payment at regular intervals, the sale price will have to factor-in the "accrued interest" since the last distribution, and the buyer will have to pay the seller for the accrued interest due while the latter held the bond.

When the next interest payment comes in, the new owner of the bond nets the interest from the time since he acquired it. In terms of debt and loans, of course, accrued interest can mean the total amount of interest payments due to the lender since the last payment.

Accrual accounting is used by corporations for their balance sheets. It also plays a role in investments such as CMOs, where debts are pooled in tranches.

What is a Corporate Bond?
What are Municipal Bond Funds?

Keywords: bonds, accrued interest, accrual accounting, loans, Collateralized Mortgage Obligation (CMO),