Accrued interest is the portion of the next coupon payment that a bond seller has earned but not yet received at the settlement date. As explained by Adam Hayes, Investopedia, and John C. Hull, University of Toronto, market practice is to separate the quoted market price from the accumulated coupon income, so buyers pay the seller for that earned portion on settlement. This interaction determines the actual cash exchanged when ownership changes.
Clean price versus dirty price
The quoted price in many markets is the clean price, which excludes accrued interest and reflects only the bond’s market value based on yield, credit risk, and time to maturity. The dirty price or full price equals the clean price plus accrued interest, and it is the amount transferred at settlement. Accrued interest is typically calculated by multiplying the coupon amount by the fraction of the coupon period that has elapsed since the last payment, using the market’s day-count convention. Different jurisdictions and bond types apply different day counts, so the exact cash paid varies by market practice.
Practical relevance, causes, and consequences
Accrued interest affects transaction cash flows and short-term trading incentives. A trade executed just before a coupon date will involve a larger accrued-interest payment than one executed right after the coupon, which can make the timing of trades economically significant for investors managing cash or tax positions. The cause is simply that coupons are owed pro rata to whoever owns the bond on the settlement date; the consequence is that yield measures and comparative pricing must use the dirty price for accurate return calculations while most quotes remain on a clean-price basis.
Markets also reflect cultural and territorial nuances. In the United States, Treasury securities use actual/actual day-count conventions while many corporate and municipal issues use 30/360, and tax treatment of coupon income differs for municipal bonds compared with sovereign or corporate debt. These variations shape investor behavior in different regions and influence secondary-market liquidity around coupon dates.
For portfolio managers and traders, the operational implication is to include accrued interest when computing required settlement financing and to adjust yields or performance metrics accordingly. For long-term investors, accrued interest does not change the bond’s economic yield over its life but matters for who receives which coupon cash flows and how prices move in the short term.