What is Accrued Interest?
Accrued interest — in German: Stückzinsen — ensures fair treatment when bonds change hands between coupon payments. The seller gets compensated for the days they held the bond; the buyer receives the full coupon at the next payment date.
Accrued interest is the interest that has accumulated on a bond since the last coupon payment. When you buy a bond between coupon dates, you pay the seller for the interest they've earned but haven't yet received. This is added to the clean price to get the dirty price.
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How Accrued Interest Is Calculated
Accrued interest = Face value × Coupon rate × (Days since last coupon / Days in coupon period). For a €1,000 bond with 3% annual coupon, 90 days since last payment: €1,000 × 3% × (90/365) = €7.40 accrued interest.
Clean Price vs. Dirty Price
Clean price: The quoted market price (excludes accrued interest). Dirty price: Clean price + accrued interest (what you actually pay). Bond markets quote clean prices for easy comparison, but settlement uses dirty prices.
Day Count Conventions
Different markets use different day counts. German government bonds use Actual/Actual (actual days elapsed / actual days in period). Corporate bonds often use 30/360 (assumes 30-day months, 360-day year). The convention affects accrued interest calculation.
Clean Price vs. Dirty Price
| Aspect | Clean Price | Dirty Price |
|---|---|---|
| Definition | Quoted market price | Price + accrued interest |
| Includes accrued interest | No | Yes |
| Used for | Price comparison | Actual settlement |
| What you pay | Not directly | Yes, this is your cost |
Practical Example: Buying Between Coupons
You buy a Bund on March 15. Last coupon was January 1, next coupon July 1. Face value: €10,000, Coupon: 2%. Days accrued: 73. Accrued interest: €10,000 × 2% × (73/181) = €80.66. If clean price is 98.50, you pay: €9,850 + €80.66 = €9,930.66. On July 1, you receive full €100 coupon.
Frequently Asked Questions
What is accrued interest in simple terms?
Accrued interest is the 'unpaid interest' that has built up since the last coupon payment. When you buy a bond, you pay the seller for their share of the next coupon.
Why do I have to pay accrued interest?
Because the seller held the bond and earned interest during that time. Without accrued interest, they would lose the interest they'd earned, which wouldn't be fair.
Do I get the accrued interest back?
Yes — through the next coupon payment. You pay accrued interest when buying, then receive the full coupon. The net effect: you earn interest only for the days you held the bond.
Is accrued interest taxable?
Yes, in most jurisdictions. When you receive the coupon, you're taxed on the full amount, even though you effectively paid part of it as accrued interest when buying.
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