What are accrued interest and interest receivable? How are they calculated?
Accrued interest refers to the interest accumulated on a bond from the last coupon payment date up to the settlement date, which the seller has earned but not yet received. When purchasing a bond, the buyer pays the seller the "clean price" plus this accrued interest. Conversely, when selling a bond, the seller recovers the interest accrued during their holding period.
US Treasuries typically pay interest semi-annually (calculated based on a 180-day convention or actual day count). The basic formula is:
Calculation Formula:
Accrued Interest = Bond Face Value × (Annual Coupon Rate / 360) × Accrual Days
