ACCRUED INTEREST Meaning and
Definition
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Accrued interest refers to the interest that has been earned or accumulated on a financial instrument or loan, but has not yet been paid or received. It represents the amount of interest that has accrued over a certain period of time, usually based on the outstanding balance or principal amount of the instrument.
In the context of investments, accrued interest can be earned on various fixed-income securities such as bonds, debentures, or certificates of deposits. It typically accrues daily and is calculated based on the interest rate and the number of days that the investment was held. For example, if an individual holds a bond for one month and the bond pays a 5% annual interest rate, the accrued interest for that month would be calculated as one-twelfth of the 5% interest rate.
Accrued interest is important for both the buyer and seller of a financial instrument. For the buyer, accrued interest represents an additional cost that may need to be paid when purchasing an instrument. Whereas, for the seller, accrued interest represents an amount that they are entitled to receive when selling the instrument.
Accrued interest is typically paid or received on the settlement date of the financial instrument, which is the date when ownership is transferred. It is often quoted separately from the principal amount and is calculated until the settlement date to ensure that both the buyer and seller receive or pay the correct amount of interest.
Etymology of ACCRUED INTEREST
The term "accrued" comes from the Latin word "accrescere", which means "to grow" or "to increase". "Interest" originated from the Latin word "interest" (pronounced "interesse"), which means "to concern" or "to be of importance". Therefore, the etymology of "accrued interest" suggests that it refers to the interest that has grown or accumulated over time.
