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NISM Certifications · NISM-Series-XV: Research Analyst · Terminology in Equity and Debt Markets

In the bond market, what does the term 'accrued interest' refer to?

Accrued interest is the coupon interest earned on a bond from the last coupon payment date up to the settlement date. The seller is entitled to it, so the buyer compensates the seller for this portion when buying between coupon dates.

  1. AInterest earned by the seller on the bond from the last coupon date up to the settlement dateCorrect
  2. BInterest the issuer will pay at maturity in addition to the face value
  3. CInterest lost by the buyer because of a fall in bond prices
  4. DInterest paid in advance by the buyer before the bond is issued

Explanation

Between two coupon dates the bond earns interest every day. When it is sold, the seller is entitled to the portion earned since the last coupon date, and the buyer pays this on top of the clean price. The other options describe unrelated ideas.

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