Calculating Accrued Interest
Municipal bonds pay interest semiannually, but interest is earned daily. When an investor purchases a bond in the secondary market, interest has already been accumulating since the last coupon payment. Interest that has been accruing up to the settlement date belongs to the previous owner. Accrued interest is added to the purchase price of the bond. This is because the new owner will receive the full semiannual interest payment when it comes due.
The calculation for accrued interest is easy. Divide the number of days that interest has accrued since the last payment date by the number of days in the year and multiply by the total annual interest payment. For the sake of simplicity, accrued interest for municipal bonds is calculated assuming a 360-day year and 30-day month (the 30/360 convention). Accrued in