What is Accrued Interest?

[soyab.reloaded]

Accrued interest is basically an accounting phenomenon which occurs due to the difference in timing of cash flows and the recognition of interest. This can be commonly seen in bonds, as they pay interest after a fixed interval say, six months whereas the interest is accrued on a day-to-day basis. In finance, accrued Interest is the interest that has accumulated since the principal investment, or since the previous interest payment if there has been one already. For a financial instrument such as a bond, interest is calculated and paid in set intervals. Accrued income is an income which has been accumulated or accrued irrespective to actual receipt, which means event occurred but cash not yet received.

Formula :

The primary formula for calculating the interest accrued in a given period is:
where is the accrued interest, is the fraction of the year, is the principal, and is the annualized interest rate.
is calculated as follows:

where is the number of days in the period, and is the number of days in the year.
The main variables that affect the calculation are the period between interest payments and the day count convention used to determine the fraction of year, and the date rolling convention in use.
A compounding instrument adds the previously accrued interest to the principal each period, applying compound interest.

The basic formula for finding the accrued interest is as follows:

Formula:

The major issue with the accrual of interest is the day convention used. Generally, a 30-day month and a 360-day year is used for corporate and municipal bonds whereas it is based on actual calendar days for Government bonds.
Example
Assume a bond with face value of Rs. 100 and interest rate of 10% pays semi-annual interest payments.
Now, after 3 months,
Accrued interest = 100 x (10%/2) x (3/6) = Rs. 2.5

 

[jitendra05]

Accrued interest is basically an accounting phenomenon which occurs due to the difference in timing of cash flows and the recognition of interest. This can be commonly seen in bonds, as they pay interest after a fixed interval say, six months whereas the interest is accrued on a day-to-day basis. In finance, accrued Interest is the interest that has accumulated since the principal investment, or since the previous interest payment if there has been one already. For a financial instrument such as a bond, interest is calculated and paid in set intervals. Accrued income is an income which has been accumulated or accrued irrespective to actual receipt, which means event occurred but cash not yet received.

Formula :

The primary formula for calculating the interest accrued in a given period is:
where is the accrued interest, is the fraction of the year, is the principal, and is the annualized interest rate.
is calculated as follows:

where is the number of days in the period, and is the number of days in the year.
The main variables that affect the calculation are the period between interest payments and the day count convention used to determine the fraction of year, and the date rolling convention in use.
A compounding instrument adds the previously accrued interest to the principal each period, applying compound interest.

The basic formula for finding the accrued interest is as follows:

Formula:

The major issue with the accrual of interest is the day convention used. Generally, a 30-day month and a 360-day year is used for corporate and municipal bonds whereas it is based on actual calendar days for Government bonds.
Example
Assume a bond with face value of Rs. 100 and interest rate of 10% pays semi-annual interest payments.
Now, after 3 months,
Accrued interest = 100 x (10%/2) x (3/6) = Rs. 2.5

Hey friend, thanks for sharing such a nice information and i am sure it would help many people and everyone would appreciate your work. BTW, i am also uploading a document on accrued interest and would like you to check it.