How Do You Calculate Accrued Interest Expense?
Computing accrued interest expense for fixed-income securities is straightforward, but investors must know what interest accrual system is being used. Corporate and municipal bonds use one system. United States Treasuries use another actual day count system. Variable-rate bonds use an accrual system like that used by the United States Treasuries. Whenever the variable interest rate changes, so must the new rate be recomputed for the new time period. Know that accrued interest expense is the amount of interest earned but not yet paid. Interest is only paid on the prescribed interest rate date (almost always a semiannual date for bonds). When bonds are traded during the semiannual period, the buyer pays the accrued interest and is repaid the accrued interest when the semiannual coupon is redeemed. Accumulate information on the bond, including the date of the last coupon, the coupon rate, the maturity and the dates of the semiannual coupon payment. All this information should be on your p
