ACCRUED INTEREST

Accrued interest is another aspect of bond pricing; it is the fraction of the coupon payment the bond seller earns for holding the bond for a period of time between bond payments. In simple terms interest is accrued on a day to day basis by the bond holder, the previous owner must be paid the interest accrued before the sale.

Inclusion of any interest accrued since the last payment period determines whether the bond is ‘dirty’ (gross) or ‘clean’ (net); dirty bonds include any accrued interest that accumulated since the last coupon payment. Clean prices do not include those details; most papers quote the clean price, yet bonds are transacted dirty. The net price varies with interest rates, although the accrued interest does not.