Accrued interest

Accrued interest is the interest that builds up on a bond between its scheduled coupon payments. Bond interest is typically paid every six months, but interest is earned continuously — so when a bond changes hands between payment dates, the seller is owed their share of the next coupon for the days they held the bond.

Here's how it works mechanically: the buyer pays the seller the agreed price plus accrued interest, calculated from the last coupon date up to — but not including — the settlement date. When the next coupon arrives, the buyer keeps the entire payment, having already reimbursed the seller for the seller's portion. For example, if a bond pays $50 every six months and the seller held it for two of those six months, the buyer pays roughly $16.67 of accrued interest at settlement.

Day-count conventions determine the exact figure. Corporate and municipal bonds accrue on a 30/360 basis, treating every month as 30 days and every year as 360 days. U.S. government bonds use actual/365, counting the actual days elapsed. Bonds trading without accrued interest — such as zero-coupon bonds or bonds in default — trade "flat." For tax purposes, accrued interest received by the seller is taxable interest income to the seller, not the buyer.

Accrued interest calculations show up regularly on the Series 7 exam, and the SIE and Series 66 exams test the underlying concepts — who pays whom, the day-count conventions, and which bonds trade flat.