Think of accrued interest like a tab at a bar.
Every day a bond is held, interest is building up. It hasn’t been paid yet — but it’s owed. When you buy a bond between coupon payments, you’re stepping in mid-tab. The seller held that bond while the interest was running up, so they get paid for their time. You pay them that interest upfront as part of the purchase price. Then, when the next coupon payment comes in, you get the full check.
It evens out. You paid it, you get it back.
The Exam Definition
Accrued interest is the interest a bond has earned but not yet paid. When a bond is sold between coupon payment dates, the buyer pays the seller the interest that has accrued since the last coupon date. The buyer then receives the full next coupon payment.
- Buyer pays accrued interest to the seller at settlement
- Buyer receives the full coupon on the next payment date
- Accrued interest is NOT part of the bond’s quoted price (it’s added separately)
- The “dirty price” = quoted price + accrued interest
- Tested on both the SIE and Series 7
Why It Matters for the Series 7 and SIE
The exam will ask you to calculate accrued interest. You need to know the formula and the day-count conventions — which differ depending on the type of bond.
For corporate and municipal bonds, accrued interest is calculated on a 30/360 basis — every month is treated as 30 days, every year as 360 days. For U.S. government bonds (Treasuries), it’s calculated on an actual/actual basis — you count the real calendar days.
This distinction trips up a lot of candidates. The exam will give you a bond type and a date range, and you have to know which calendar to use before you can do the math. Get the day-count convention wrong and the whole calculation is wrong.
Real Exam Scenarios
Scenario 1 — The Basic Calculation
A corporate bond pays a 6% annual coupon on January 1 and July 1. An investor buys the bond on April 1. How much accrued interest does the buyer owe?
The last coupon was January 1. From January 1 to April 1 is 90 days (using 30/360: Jan = 30, Feb = 30, Mar = 30). The daily interest on a $1,000 bond at 6% is $60/360 = $0.167. Multiply by 90 days = $15.00 in accrued interest.
Scenario 2 — The Settlement Timing Question
A bond trade settles on the same day as a coupon payment. Does the buyer or seller receive the coupon?
The seller. Whoever owns the bond on the record date receives the coupon. Since the trade settles on the coupon date itself, the seller is still the owner of record. The buyer gets no accrued interest in this case and pays none — but they start earning interest from that day forward.
Scenario 3 — Clean Price vs. Dirty Price
A bond is quoted at 98. The buyer will actually pay more than $980 per $1,000 par. Why?
The quoted price (98, or $980) is the “clean price” — it does not include accrued interest. The actual amount the buyer pays is the “dirty price” = clean price + accrued interest. Bonds are quoted clean but settle dirty. The exam may test whether you know the difference between what’s quoted and what’s actually paid.
Common Traps and Misconceptions
Trap 1: Confusing accrued interest with accretion. These sound similar but are completely different. Accrued interest is about coupon payments owed between payment dates. Accretion is about the book value of a discount bond rising toward par. Don’t mix them up.
Trap 2: Using the wrong day-count convention. Corporates and munis use 30/360. Governments use actual/actual. The exam will specify the bond type. Apply the right convention or the math will be off.
Trap 3: Thinking the buyer “loses” the accrued interest. They don’t. Yes, they pay it upfront — but they receive the full next coupon payment. The math nets out to zero. The buyer only earns interest from the settlement date forward.
Trap 4: Forgetting that bonds are quoted “clean.” The price you see quoted on a bond does not include accrued interest. What you actually pay is higher. This is the dirty price. The exam knows most candidates forget this and will test it.
Related Concepts
Accretion — The gradual upward adjustment of a discount bond’s book value. Completely different from accrued interest. → See: What is Accretion?
Settlement Date — For most bonds, settlement is T+1 (one business day after the trade date). The accrued interest calculation runs through the settlement date, not the trade date.
Coupon Rate — The stated annual interest rate on the bond, used to calculate how much interest accrues per day. A 6% coupon on a $1,000 bond = $60/year = $0.167/day (30/360 basis).
Keep Studying
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Related Terms:
→ What is Accretion?
→ What is Ad Valorem Tax?
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