Accrued Interest Adjustment Details

Accrued interest is the sum of the gathered interest since the last coupon payment date. It's the amount owed to you on your convertible bond or other fixed-income security when you held the bond.

A convertible bond (a bond you can covert to equity) comes with options. You have the right to convert your bond into the equity of the issuing company or a subsidiary. An interest-paying convertible bond will make coupon payments to you for the duration of time the bond is yours. Coupon payments are annual or semi-annual interest payments that you receive on your bond. You will receive the coupon payment for as long as you own the bond. Once you decide to sell your convertible bond, you will receive one last interest payment, then all coupon payments transfer with the bond to the new owner.

The accrued interest earned is documented on Form 1099-INT to use when you then pay your taxes. Accrued interest adjustments can decrease the taxable income of the bondholder. The interest will still be taxed according to all tax laws.

Example of Accrued Interest Adjustment

After you have converted the bond to shares, you will stop receiving interest payments. At the time you converted the convertible-bond, there is always one last partial payment made to you. The partial payment is the amount that has accrued since the previous payment date on record.

  • Example: Let's say your bond's interest will be paid on March 30 and September 30 every year. If you convert the bond to equity on July 30, you'll receive the interest accumulated from March 30 to July 30.

If you're buying a bond in the secondary market, you'll pay the seller's accrued interest. The payment of accrued interest is part of the total selling price.

  • Example: You bought a bond sometime between the last coupon payment. On the next coupon payment, you'll receive the full interest on the fixed coupon payment date. You will still receive the total interest payment if you're the bondholder of record. This final interest payment is accrued interest.

However, remember that buying a bond doesn't allow you to earn all of the interest accrued over the period. You must pay the bond seller the portion of the seller's interest before selling the bond to you.

  • Example: A bond has a fixed coupon that is to be paid semi-annually on June 30 and December 30 every year. If the bond is sold to you on October 30, you're going to receive the full coupon payment on the next coupon date. That is December 30. In this scenario, you must pay the seller of the bond the interest accrued from June 30 to October 30. Generally, the price at which you bought the bond will include the accrued interest. This price is commonly referred to as a full or dirty price.