What is Accrued Interest?
Accrued interest refers to the amount of unpaid interest that has accumulated on an account even though is hasn't been paid out yet. For example, if you have a certificate of deposit that pays interest once a month, interest is accruing each day not just on the day that is it paid.
How to Calculate Accrued Interest
Determine the interest rate. For example, your certificate of deposit may pay an interest rate of 3.65 percentper year. Next, determine how many days are in the period. Since the interest rate is per year, divide the interest rate by 365 days. Divide the interest rate by the number of days in the period. Your certificate of deposit's daily interest rate would be 0.01 percent. Then calculate the amount of interest that accrues per day. If you had $10,000 in your CD, interest would accrue at a rate of $1 per day. Then multiply the daily rate times the number of days that interest had been accruing. For example, if it had been 20 days since the last interest payment, you would have $20 in accrued interest.
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Uses for Accrued Interest
Accrued interest is most useful when transferring interest-bearing securities, such as bonds or loans. As the seller of the loan, you will want to be compensated for the price of the bond as well as any interest that has accrued in it since the last payment. For example, if you had a bond with a face value of $10,000 and paid 12 percent per year, the bond would pay $100 per month in interest. If you were selling a bond two-thirds of the way through a month, you would want an additional $66.67 added to the selling price because if you held the bond for an additional third of a month you would be paid $100.