Accrued interest is simply defined as an amount of interest which is currently due that has not been paid yet in a bond issue. Calculating an accrued interest varies on the number of days that passed from the last disbursement of interest to the owner of the said bond. During this process, it is also significant that you know the latest interest rate which is compounded in each coupon date schedule.
Understanding on how to calculate the accrued interest is vital when a buyer decides to purchase an occurring bond issue. The buyer is the sole responsible in paying the seller on the amount of the purchased bond together with the interest that has accrued during the disbursement of the paid last interest and the selling date of the bond to the new owner. To ensure that the accrued interest is calculated well, knowing how interest is compounded and if the bond pays the interest in semiannual and or annual basis are ultimately significant.
For instance, say, the bond is worth $10,000 USD along with an interest rate of 6% which is paid in semiannual basis, the buyer may need to pay the seller an amount of $10, 600 USD for the whole purchase. Assuming that the current period is almost completed. The given figure includes the price of the purchase and the amount of generated interest payment that the seller will receive once the buyer opts to hold on the asset. The good thing is that the buyer or the new owner of the bond will recoup the extra amount of $600.00 USD right after the next semiannual period is almost over.
In terms of taxes employed in the interest payments related to the bond issue, the seller is responsible in any or all interest payments included in the bond as well as the accrued interest paid by the new owner during the purchase. The buyer will be responsible in paying the accrued interest obtained after the date of sale.
Aside from the interest obtained from bonds, accrued interest may be referred to as the amount of interest generated in mortgages as well as in other types of loans in the current date. The individual or the borrower is obligated to pay the accrued interest to the lender. In case of early payments of the maid mortgage or loan, the borrower may talk to the lender and ask to compute the total of the principal and the interest due balance to be able to determine how much is still needed to settle the entire debt. This is very important to the part of the borrower to be able to prepare and secure for the right amount during the pay off.
An accrued interest must be explained well by the seller and by the lender to ensure that every single detail of the bond and the mortgage are of best investment. As we all know, money is such an important thing and people are meticulous enough when it comes to investment since once started, it may be hard to get it back again.