What is the formula for calculating accrued interest on a bond?

The formula for calculating accrued interest on a bond is correctly represented by multiplying the coupon amount by the fraction of the accrued days over the total days in the period. This approach accounts for the time value of money and the fact that bond interest typically accrues on a regular schedule, often semi-annually.

When a bond is sold between interest payment dates, the seller is entitled to receive the interest that has accrued from the last interest payment date up to the date of sale. The accrued interest is effectively the portion of the next coupon payment that the seller has earned but has not yet received because the coupon payment date is still in the future.

The calculation involves determining what portion of the coupon payment corresponds to the actual number of days that have passed since the last coupon payment. By dividing the number of days that have accrued by the total number of days in the current coupon period, you can establish a proportion. This proportion is then multiplied by the total coupon payment to arrive at the accrued interest.

This method ensures that both buyers and sellers understand the exact amount owed for interest that has accumulated during the period the bond was held before the sale, allowing transactions to take place fairly and transparently in the bond market.