Accrued interest
The slice of the next coupon the seller has earned by holding the bond up to the settlement date. The buyer advances it and collects the whole coupon later, so it is a transfer between them rather than a cost.
Where you will meet it
Accrued interest appears in 2 learning outcomes on the CFA syllabus. A few of them:
- Tell apart the full price, the flat price and accrued interest
“Accrued interest is the portion of the next coupon earned by the seller for the days they held the bond, computed on an actual or thirty-day convention depending on the market.”
- Explain the pricing of fixed-income forwards and futures, and work out their no-arbitrage value and say what it means
“Compound the full price to delivery, subtract the future value of coupons received before then and the accrued interest at delivery, and, for futures, divide by the delivered bond's conversion factor, so the quoted futures price is F0 = [(B0 + AI0) × (1 + r)^T − AIT − FV of coupons] ÷ CF.”
Learn it properly
Practise it
Practise accrued interest until it is automatic: questions that explain every wrong option.
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