Accrued interest is interest that has been incurred on a loan, legal obligations, or other savings but has not yet been compensated by the borrower. Therefore, accrued interest acts as an expense for the borrower and revenue for the lender in the form of interest payments from the former. Accrued interest on a loan is tax-deferred until it is inhibited. Accrued interest is payable to the lender at the time of repayment since the last payment date on a bond sold on the secondary market. In real estate, accrued interest is mostly applicable to debt and bridge financing instruments, whereby it grants the borrower with more flexible loan repayment schedules and the investor or lender with higher returns.
Calculating Accrued Interest: –
The formula to calculate Accrued Interest is:
Face Value * (Coupon rate /365) *Accrual Period
As the accrual period is calculated in days, we need to calculate the bond’s daily incomes.
For this, we simply have to divide the coupon rate by 365, the total number of days in a year, to attain the daily rate of interest.
And the accrual period is only the number of days from the date the bond last paid interest to the trader.
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