Interest on a corporate bond accrues daily on a 30/360 basis: every month is treated as 30 days and every year as 360, so interest builds in equal daily increments between coupon payments. That daily accrual decides how much a buyer owes the seller at settlement, and it also drives several tax rules that behave differently depending on whether you bought the bond at face value, at a discount, or at a premium.
How the 30/360 Convention Works
Most U.S. corporate bonds use the 30/360 day count convention. Every month is assumed to have exactly 30 days and every year exactly 360 days, regardless of the actual calendar. February counts as 30 days. A six-month coupon period is always 180 days. The fraction of the year that has elapsed between two dates is the number of 30/360 days between them divided by 360.1Corporate Finance Institute. Day-Count Convention
You don’t choose the convention. It’s locked in at issuance and specified in the bond’s indenture. For U.S. corporates, 30/360 is the near-universal default, which means you never have to worry about leap years or uneven months when pricing a trade.2WWWFinance. Day Counting for Bonds
One boundary worth noting: this is a corporate-bond rule. U.S. Treasuries use Actual/Actual, counting real calendar days in both the period and the year.3U.S. Department of the Treasury. Interest Rates – Frequently Asked Questions Short-term money market paper typically uses Actual/360.4Nasdaq. Actual/360 If you’re calculating accrual on anything other than a corporate bond, check which convention applies.
Calculating How Much Has Accrued
Accrued interest is the interest the current bondholder has earned since the last coupon payment. The formula:
Accrued Interest = Face Value × Coupon Rate × (Days Since Last Coupon ÷ 360)
Take a $1,000 bond paying a 5% annual coupon in semi-annual installments. Each coupon is $25. If the trade settles 60 days after the last coupon under 30/360, accrued interest is $1,000 × 0.05 × (60 ÷ 360) = $8.33. The daily increment never changes within a coupon period; it just keeps adding up until the next payment resets the counter.
What a Buyer Actually Pays at Settlement
Bond markets quote prices without accrued interest baked in. That quoted figure is the clean price, and it reflects the bond’s value based on creditworthiness and prevailing interest rates. The amount a buyer actually pays at settlement is the dirty price: the clean price plus accrued interest. Separating the two keeps quoted prices from drifting upward day by day as interest piles up.
Why does the buyer pay the seller for accrued interest? Because the issuer sends the entire next coupon to whoever holds the bond on the payment date. A buyer who purchases mid-period will collect the full coupon, including interest earned while the seller still owned the bond. The accrued-interest payment at settlement compensates the seller for those days. When the coupon arrives, the buyer effectively recovers the amount advanced.
Settlement Date, Not Trade Date
Accrued interest runs through the settlement date. Corporate bonds now settle on a T+1 basis, meaning the transaction finalizes one business day after the trade date. The SEC shortened the standard settlement cycle from T+2 to T+1 effective May 28, 2024, for most securities transactions including stocks, bonds, and ETFs.5U.S. Securities and Exchange Commission. SEC Finalizes Rules to Reduce Risks in Clearance and Settlement Under amended Rule 15c6-1(a), broker-dealers cannot enter into a contract that provides for payment and delivery later than the first business day after the trade date, unless both parties expressly agree otherwise.6U.S. Securities and Exchange Commission. Shortening the Securities Transaction Settlement Cycle One fewer calendar day between execution and settlement means slightly less accrued interest owed than under the old T+2 rule.
How Accrued Interest Gets Taxed When a Bond Changes Hands
The accrued interest a buyer pays the seller is ordinary interest income to the seller. For the buyer, it’s a return of capital, not interest income.7Internal Revenue Service. Publication 550 (2025), Investment Income and Expenses That matters because your broker’s year-end Form 1099-INT will typically show the full coupon payment you received, including the slice you already paid for at purchase. Without an adjustment, you’d be taxed on money you never economically earned.
The fix goes on Schedule B. Report the full interest shown on the 1099-INT, then subtract the accrued interest you paid at purchase, listing the subtraction below your interest subtotal and labeling it “Accrued Interest.”8Internal Revenue Service. Instructions for Schedule B (Form 1040) If you paid $10 at purchase and later received a $25 coupon, only $15 ends up taxable to you.
How the Coupon Itself Is Taxed
Corporate bond interest is ordinary income at your marginal federal rate. There is no federal tax exemption for corporate bonds the way there is for most municipal bonds. Individual investors generally report on the cash basis, so interest hits your return in the year you actually receive the coupon.9Internal Revenue Service. Topic No. 403, Interest Received Coupons are reported to you and the IRS on Form 1099-INT.
Bonds Bought Below Face Value
Buying a bond for less than face value is one of the places accrual rules get complicated, because the tax code treats a discount built in at issuance differently from a discount that opened up later in the market.
Original Issue Discount
A bond issued below face value carries an original issue discount (OID). That discount is built-in interest the holder earns over the bond’s life, and the IRS doesn’t let you wait until maturity to recognize it. Under Section 1272 of the Internal Revenue Code, you must include a portion of the OID in gross income every year you hold the bond, even if you receive no cash that year.10Office of the Law Revision Counsel. 26 USC 1272 – Current Inclusion in Income of Original Issue Discount
The annual amount uses the constant yield method. Rather than spreading the discount evenly, each year’s accrual is based on the bond’s growing adjusted issue price multiplied by its yield to maturity, so less income comes in early and more later. The issuer or your broker reports the annual figure on Form 1099-OID.11Internal Revenue Service. Instructions for Forms 1099-INT and 1099-OID
Zero-coupon corporate bonds are the extreme case. They pay no periodic interest at all, so the entire return is the discount. You owe tax every year on accrued OID without any cash arriving to pay the bill. This phantom-income problem is the reason zero-coupon bonds are often held in tax-advantaged accounts like IRAs, where the annual accrual doesn’t produce a current tax hit.
Market Discount
A bond you buy on the secondary market for less than face value (or less than its adjusted issue price if it already carries OID) is a market discount bond. You generally don’t owe tax on the discount until you sell or redeem, but when you do, the gain is treated as ordinary interest income rather than capital gain, up to the amount of accrued market discount.12Office of the Law Revision Counsel. 26 USC 1278 – Definitions and Special Rules
A de minimis exception keeps small discounts out of this regime. If the discount is less than 0.25% of face value times the number of complete years remaining to maturity, it’s treated as zero and any gain is a capital gain.12Office of the Law Revision Counsel. 26 USC 1278 – Definitions and Special Rules On a $1,000 bond with 10 years to maturity, the threshold is $25 (0.25% × $1,000 × 10). Buy it for $980 and the $20 discount falls below the line, so any gain at sale is capital.
Above the threshold, you need to track accrued discount while you hold the bond. The default is straight-line accrual across each day from acquisition to maturity. You can elect the constant yield method instead, which pushes more accrual into later years; that election applies to all market discount bonds you acquire in the year you make it and cannot be revoked without IRS consent. A separate election lets you include market discount in income currently each year rather than deferring to disposition, which converts future ordinary income into current ordinary income but avoids a large hit at sale.
Bonds Bought Above Face Value
If you buy a corporate bond for more than face value, you have the option to amortize that premium over the bond’s remaining life. The amortization offsets your interest income each year, reducing the taxable portion of each coupon.13Office of the Law Revision Counsel. 26 USC 171 – Amortizable Bond Premium
For taxable corporate bonds, the election is yours to make, but it comes with strings. Once elected, it applies to all taxable bonds you currently hold and all taxable bonds you acquire going forward; you can’t pick and choose. The amortization uses the constant yield method, which puts more of the premium against earlier periods when the bond’s carrying value is highest.14eCFR. 26 CFR 1.171-1 – Bond Premium
Whether to elect depends on your situation. Amortizing reduces your taxable interest each year but also lowers your cost basis, so you’ll see a smaller capital loss (or larger capital gain) when you sell. For investors in higher brackets holding to maturity, the election usually works out favorably because it converts what would be a capital loss at maturity into annual reductions of ordinary income taxed at a higher rate.