Accrued Interest
Most bonds trade “and interest,” which means that the price includes any interest that has accrued on the bond from the time interest was last paid until the day before the settlement date. The settlement date is the date that buyers are expected to pay for the securities they purchased and sellers are expected to deliver the securities they sold. Settlement is two business days after the trade date for most securities. This is called regular way settlement.
Most bonds pay interest every six months according to one of the following schedules:
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Bond Interest Payment Schedule |
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Months in which interest is paid |
Short name for this type of bond |
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January and July |
J&J bonds |
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February and August |
F&A bonds |
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March and September |
M&S bonds |
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April and October |
A&O bonds |
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May and November |
M&N bonds |
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June and December |
J&D bonds |
If a trade occurs in the middle of July for an M&N bond, the seller is entitled to the amount of interest accrued from the last interest payment until the day before the bond settles. Therefore, the buyer would have to add the amount of interest owed to the seller to the price of the transaction.
Accrued interest is added to the amount of the buyer’s sales confirmation because the buyer must pay the price of the security plus the added interest. Accrued interest is also added to the amount on the seller’s confirmation because he receives the price of the security plus the