Accrued interest

Interest accumulates on a bond every day between coupon payments, even though the issuer only sends cash on the scheduled payment dates. Accrued interest is the portion of the next coupon that has built up since the last payment date but has not yet been paid out. It matters most when a bond changes hands between coupon dates, since a buyer stepping in partway through a coupon period owes the seller for the interest the seller earned while holding the bond.

In practice, a bond buyer pays the quoted price plus accrued interest, an amount often called the dirty price, while the quoted price alone is the clean price. The seller receives that accrued amount immediately at settlement rather than waiting for the next scheduled coupon, and the buyer then collects the full coupon on the next payment date, which effectively reimburses the amount already paid for accrued interest.

Accrued interest is calculated using a day count convention that varies by bond type, a fraction of the annual coupon based on how many days have passed since the last payment. Understanding it prevents an investor from assuming a bond's quoted price is the whole cost of buying it, or from being surprised that a freshly purchased bond pays a full coupon shortly after purchase even though the buyer only held it for part of the period.