Accrued interest on a bond is the interest that has built up since the bond’s last coupon payment but hasn’t been paid out yet. When a bond changes hands between payment dates on the secondary market, the buyer pays the seller for the days the seller held the bond during the current coupon period. That amount is added to the purchase price at settlement, and when the next full coupon arrives, the buyer keeps all of it. The adjustment leaves both sides with only the interest they actually earned.
How the Calculation Works
Three inputs drive the math: the bond’s face value (usually $1,000), its annual coupon rate, and the number of days the seller held the bond since the last coupon payment. Multiply face value by the coupon rate, then multiply by the fraction of the year the seller owned the bond. That is the accrued interest owed at settlement.
The wrinkle is what counts as a “day” and a “year.” Different bond types use different day-count conventions.
30/360 for Corporate and Municipal Bonds
Corporate and municipal bonds generally use 30/360, which treats every month as 30 days and every year as 360. For a corporate bond with a 5% coupon held 90 days past the last payment, the accrued interest is $1,000 × 0.05 × (90 ÷ 360) = $12.50.
Actual/Actual for Treasuries
Treasury notes and bonds use Actual/Actual, counting real calendar days and dividing by the real length of the year. Leap years shift the denominator from 365 to 366, and February contributes 29 days instead of 28. For a Treasury bond with a 4% coupon where 182 actual days have passed in a 365-day year, the accrued interest is $1,000 × 0.04 × (182 ÷ 365) = $19.95.
What Moves the Accrued Amount
Two things drive how much you owe or receive. The first is how often the bond pays. Most U.S. corporate and government bonds pay semi-annually, so the accrued clock resets every six months. Some international bonds pay only once a year, so interest stacks up longer and any mid-period trade carries a bigger accrued charge.
The second is timing. Buy a bond the day after a coupon payment and the accrued interest is negligible. Buy it the week before the next payment and you’ll owe the seller close to a full period’s worth. You get that money back at the next coupon, but you still need the cash upfront.
TIPS and Inflation Adjustments
Treasury Inflation-Protected Securities complicate things. TIPS pay a fixed coupon rate, but the principal moves with the Consumer Price Index, and interest is calculated on the adjusted principal. Accrued interest on TIPS therefore rises or falls with inflation. The Treasury multiplies the unadjusted accrued interest by an Index Ratio comparing the CPI reference value on the settlement date to the CPI reference value on the bond’s original dated date. Two TIPS with identical coupons can generate different accrued interest amounts depending on how much inflation has moved since issuance.
Clean Price, Dirty Price, and Settlement
The number you see on a brokerage quote screen is the clean price: the bond’s market value with no accrued interest attached. What actually leaves your account is the dirty price, also called the full price, which is the clean price plus accrued interest. A bond quoted at $980 clean with $15 in accrued interest costs $995 to buy.
Clean prices make it easier to compare bonds without the sawtooth pattern of accrued interest between coupon dates. But the dirty price is what settles, so the difference matters when you’re sizing an order.
Settlement for most broker-dealer securities transactions now happens on a T+1 basis, one business day after the trade date. That standard took effect on May 28, 2024, replacing T+2. Interest accrues through the settlement date, not the trade date. Your broker runs the accrued-interest calculation automatically, but the settlement confirmation is worth a look.
When Bonds Trade Flat
Not every bond trade carries an accrued interest charge. Bonds in default on interest or principal trade “flat,” meaning the quoted price is the total price with no separate accrued interest line. Income bonds, which pay interest only when the issuer earns enough to cover it, also typically trade flat. And if a bond settles exactly on a coupon date, there’s no accrued interest: the seller collects the coupon that just ended, and the buyer starts the next period fresh. These are the exceptions. Most secondary-market bond trades include an accrued interest adjustment.
How Accrued Interest Is Taxed
The IRS treats accrued interest as ordinary interest income. Reporting depends on which side of the trade you were on.
If You Sold a Bond Between Coupon Dates
The accrued interest the buyer paid you is taxable interest income in the year of the sale, even though it came from another investor rather than the issuer. Report it as interest income on your return for that year.1Internal Revenue Service. Publication 550 (2024), Investment Income and Expenses
If You Bought a Bond Between Coupon Dates
When your first full coupon arrives after the purchase, part of it is really the accrued interest you already paid the seller. You should not be taxed on money that was never your income. Your broker will report the full coupon on Form 1099-INT, so you have to correct for the overlap yourself.
The IRS instructions tell you to list all your interest income on Schedule B (Form 1040), take a subtotal, write “Accrued Interest” below it with the amount you paid at purchase, and subtract that figure to arrive at your net taxable interest.1Internal Revenue Service. Publication 550 (2024), Investment Income and Expenses2Internal Revenue Service. Instructions for Schedule B (Form 1040) Skip this step and you’ll pay tax on interest that was really the seller’s. It is one of the more commonly missed adjustments among individual bond investors.
Tax-Exempt Municipal Bonds
If the bond you bought pays interest exempt from federal income tax, the accrued interest you paid the seller is treated as tax-exempt interest rather than taxable interest. The adjustment mechanics are the same, but it reduces your tax-exempt interest total instead of your taxable interest. The seller reports the accrued amount they received as tax-exempt income on their side.
Bonds That Don’t Fit the Standard Pattern
Zero-Coupon Bonds
Zero-coupon bonds pay no periodic interest. They sell at a deep discount and pay full face value at maturity, and the difference is original issue discount (OID), which the IRS treats as interest. You have to include a portion of the OID in gross income each year even though no cash arrives, using a constant-yield method that assigns more income to later years.3Office of the Law Revision Counsel. 26 USC 1272 – Current Inclusion in Income of Original Issue Discount Each year’s OID inclusion increases your basis, which reduces your capital gain or increases your loss at sale or maturity.1Internal Revenue Service. Publication 550 (2024), Investment Income and Expenses
If you buy a zero on the secondary market, the accrued OID since the last tax year works much like accrued interest on a coupon bond. You’ll need the adjusted issue price and yield to maturity to allocate the discount to your holding period. Your broker usually reports the figures on Form 1099-OID.
Bonds Bought at a Premium
If you pay more than face value, the excess is bond premium. You can elect to amortize the premium and use it to offset the interest income you receive each period, reducing your taxable interest.4Office of the Law Revision Counsel. 26 USC 171 – Amortizable Bond Premium A portion of the premium is allocated to each accrual period and subtracted from the stated interest; if a bond pays $10,000 in interest for a period and $1,118 of premium is allocable to that period, you report $8,882.5eCFR. 26 CFR 1.171-2 – Amortization of Bond Premium Amortization also reduces your basis. The election is optional for taxable bonds, but once made, it applies to every taxable bond you own and every one you acquire later, so run the numbers before committing.