Accrued interest on a bond is the share of the next coupon payment that has built up day by day since the last payment date but hasn’t been paid out yet. It matters most when a bond changes hands between coupon dates: the buyer pays the seller for the interest the seller earned while holding the bond, so neither side loses income to the timing of the trade. That same payment then has to be sorted out at tax time, because the IRS taxes interest based on who actually earned it, not who receives the check.1Office of the Law Revision Counsel. 26 USC 61 – Gross Income Defined
How the Payment Moves Between Buyer and Seller
Most bonds pay a coupon on a fixed schedule, typically every six months. Interest doesn’t pause between those dates. It accumulates from the moment the last coupon was paid, and if you sell 90 days into a 180-day period, you’ve earned half the upcoming payment even though the issuer hasn’t sent anything yet.
At settlement, the buyer reimburses the seller for that earned-but-unpaid amount. When the next coupon arrives, the issuer pays the full amount to whoever holds the bond on the record date, which is now the buyer. The buyer keeps the whole coupon, but part of it is simply recovering what they already paid the seller.
Clean Price and Dirty Price
Bond prices are quoted two ways. The clean price is the headline number on the trading screen and reflects only the bond itself. The dirty price is what actually changes hands: clean price plus accrued interest. Splitting them keeps the quoted price from swinging up and down just because interest is dripping in each day.
Settlement Sets the Cutoff
The settlement date determines the exact accrued interest figure. As of May 28, 2024, most U.S. bond trades settle the next business day after the trade under the T+1 rule.2SEC. Shortening the Securities Transaction Settlement Cycle Sell a corporate bond Monday and accrued interest is calculated through Tuesday.
The Formula, With a Worked Example
You need three inputs: the bond’s face value, its annual coupon rate, and the number of days since the last interest payment.
Accrued Interest = Face Value × (Annual Coupon Rate ÷ Periods per Year) × (Days Since Last Payment ÷ Days in the Period)
Take a $1,000 bond with a 6% annual coupon, paid semiannually. The last coupon was January 1. You sell on April 1, ninety days later.
- Semiannual coupon: $1,000 × 6% ÷ 2 = $30
- Days elapsed: 90 out of 180
- Accrued interest: $30 × (90 ÷ 180) = $15
The buyer pays the clean price plus $15. On July 1 the buyer receives the full $30 coupon and effectively nets $15 for their own three months of holding the bond.
Day-Count Conventions
The “days” in that formula aren’t always a plain calendar count. Different bond markets use standardized rules to keep the math consistent.
- 30/360. Every month is treated as 30 days and the year as 360. Corporate and municipal bonds typically use this convention.
- Actual/Actual. Precise calendar days in both the accrual period and the year. U.S. Treasury notes and bonds use this method, so a 31-day month counts as 31 and a leap year counts as 366.
On a single small trade the difference is usually pennies. It grows on large positions and matters when you’re comparing yields across bond types. If you’re checking a broker’s number, use the convention the bond actually follows.
How Accrued Interest Is Taxed
The tax code treats interest as gross income regardless of whether you got it as a coupon or as accrued interest at a sale.1Office of the Law Revision Counsel. 26 USC 61 – Gross Income Defined Because the payment moves between two parties, both sides have something to report.
If You Sold the Bond
The accrued interest you received from the buyer is ordinary interest income in the year of the sale. Your broker reports it on Form 1099-INT and you include it on your return along with any other interest.
If You Bought the Bond
When the first coupon after your purchase arrives, your broker reports the entire payment as interest income on Form 1099-INT. Part of that amount is money you already paid the seller, and you shouldn’t be taxed on it twice. On Schedule B of Form 1040, you list a subtotal of your interest, write “Accrued Interest” underneath, and subtract the amount you paid the seller before carrying the result to line 2.3Internal Revenue Service. Publication 550 – Investment Income and Expenses4Internal Revenue Service. Instructions for Schedule B (Form 1040)
Skipping this step means paying tax on income that belonged to the seller. If a year-end statement shows an interest figure that looks too high compared with the coupons you actually earned, the missing accrued interest subtraction is usually the reason.
Municipal Bonds
Interest from most state and local government bonds is exempt from federal income tax, and the exemption extends to accrued interest. When you buy a tax-exempt bond between payment dates, the accrued interest you pay the seller is treated as tax-exempt rather than taxable. Brokers report it in Box 8 of Form 1099-INT, the box for tax-exempt interest, including accrued qualified stated interest on bonds sold between interest dates.5Internal Revenue Service. Instructions for Forms 1099-INT and 1099-OID
Where Accrued Interest Doesn’t Apply
A few situations look like they should involve accrued interest but don’t work the same way.
Zero-coupon bonds pay no periodic interest, so there’s no buyer-seller accrual to settle. Instead, holders must include a portion of the bond’s original issue discount in income each year under 26 U.S.C. § 1272, using a constant-yield method rather than the flat daily accrual used for coupon bonds.6Office of the Law Revision Counsel. 26 USC 1272 – Current Inclusion in Income of Original Issue Discount
U.S. savings bonds (Series EE and Series I) aren’t sold on the secondary market, so there is no buyer-seller accrued interest transfer. The Treasury adds interest to the bond’s value semiannually and compounds it into principal.7TreasuryDirect. I Bonds Interest Rates Most holders defer reporting the interest until they cash the bond, though cash-basis taxpayers can elect to report annually.8eCFR. 26 CFR 1.61-7 – Interest
Bonds in default trade “flat.” The quoted price covers principal and any unpaid interest together, and no accrued interest is added at settlement, because the issuer has already failed to make scheduled payments and regular accrual no longer holds. Income bonds, which only pay interest when the issuer earns enough to cover it, trade flat for the same reason. A bond quoted flat is a signal of financial distress on the issuer’s side.