How to Calculate Accrued Interest on Bonds Purchased

Determining the correct amount of accrued interest requires some specific calculations.

Determining the correct amount of accrued interest requires some specific calculations.

Most bonds pay interest only twice a year. In between payments, bonds accrue interest on a daily basis. Since the seller of a bond is entitled to that interest, you must pay the amount of accrued interest on any bond you purchase. When the next interest payment date arrives, you will receive the full interest payment yourself. Typically, your financial services firm will calculate for you the amount of accrued interest you must pay.

Determine the bond type you are purchasing. Most corporate and municipal bonds use a 360-day calendar for computing accrued interest. Government securities, such as U.S. Treasury bonds, use a 365-day calendar.

Find the interest rate of the bond, expressed as a decimal. Bonds are described by issuer, interest rate and maturity date. For example, you might buy a State of California 5 percent bond due on Oct. 31, 2035. In this example, the interest rate is 5 percent, so you would note it as .05.

Note the total par value of the bonds you are purchasing. Most bonds have a par value, or the amount that will be paid at maturity, of $1,000. If you buy 100 bonds, your total par value will be $100,000.

Multiply the interest rate by the total par value. For example, if the interest rate is 5 percent, and you are buying bonds with a total par value of $100,000, your calculation will be .05 x 100,000 = $5,000.

Calculate the number of days of accrued interest. Interest accrues from the most recent payment date up to but not including the settlement date of the purchase. Note that the settlement date of a trade is usually three business days after the actual date of purchase.

Divide the amount of interest days by either 360 or 365, depending on the type of bond. For example, if you are buying a municipal bond and 108 days have passed between the last interest payment date and the settlement date, your calculation will be 108/360, or .30.

Multiply the product of your interest rate and par value by the quotient of your interest days and 360 or 365. For example, if your interest rate and par value multiply out to 5,000, and your interest day calculation quotient comes to .30, your calculation is 5,000 times .30, or $1,500. This is the total amount of accrued interest you owe.

Photo Credits

  • Jupiterimages/Polka Dot/Getty Images