With the passage of time, interest gets accumulated on the bond but will be paid only at the next coupon payment date. This is similar to the interest payable on a loan. The interest on a loan gets accumulated daily but will be paid out monthly (IN EMIs). So the accrued interest is the interest that is accumulated from the previous coupon payment date or the date of issuance of the bond. If a bond holder wants to sell the bond before the coupon payment date then accrued interest is added to the sale price.
The formula for calculating accrued interest is
There are different market conventions for calculating Number of Days from Last Coupon and Number of days in the Coupon Period.
30/360 convention Actual/360 convention
The numerator is the number of days to be considered in a month and the denominator is the number of days to be considered in a year.ADVERTISEMENTS