Glossary - Accrued Interest
Accrued interest refers to the interest that has accumulated on a bond, loan, or any interest-bearing financial instrument from its issue date or from the last payment date up to the current date but has not yet been paid to the lender or bondholder. It represents the liability for the issuer and an asset for the investor, corresponding to the time value of money for the period the principal amount is outstanding.
Also known as
- Interest accrual
- Accumulated interest
Use cases examples
- Bond Prospectus: The bond will accrue interest at a rate of 5% per annum, payable semi-annually. Any accrued interest payable at redemption will be calculated from the last interest payment date to the date of redemption.
- Loan Agreement: Interest on the unpaid principal balance of the Loan will be calculated on a 365-day year basis and will accrue daily from the date of disbursement until paid in full.
Considerations for investors
- Investors need to evaluate the impact of accrued interest on investment returns, especially in fixed-income securities.
- It is important to understand the terms of accrual and the rate at which interest accrues, as this can significantly affect the total interest income over the life of an investment.
Considerations for founders
- Certain loan agreements or financial instruments may require the accrual of interest, impacting cash flow and financial planning.
- Understanding the accrued interest calculation method is crucial for accurately reporting financial liabilities and expenses in financial statements.
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