Accrued interest is the amount of unpaid interest on a loan, bond or other financial product. You can make money on accrued interest when it comes to bonds, investments, and savings accounts. Similar to regular interest, you can think of it as the price a financial institution pays you to lend you your money — or the price you pay a financial institution to lend their money. As a borrower, accrued interest can cost money because it is the accrued interest on a loan or credit card that has not yet been paid.
Here’s a closer look at how accrued interest works with different financial products:
In connection with loans, accrued interest may begin when you pay off your loan and continue to accrue until you repay it in full. This is also common practice, e.g student loans also. Additionally if you take out a mortgageusually accrue monthly interest when you borrow the money to buy your home.
With investment accounts, the amount of interest accrued is always based on the interest rate you receive and your capital balance. Interest-bearing accounts such as savings accounts or Certificates of Deposit (CDs)Interest accrues daily and the return is based on your average daily balance.
A common example of interest-bearing investments is Bind. With bonds, the bondholder lends money to the government for a period of time, and the government pays back the money to the bondholder, plus interest accruing between payouts. Also note that if you’re invested in a bond, you’ll typically receive a fixed payment of interest quarterly, semiannually, or annually, not daily.