I have no idea who wants to know this, but somebody must. Instead of calculating the accrued interest on a bond at a specific point in time (as we did above), it calculates the amount of interest that has been earned since the day that the bond was issued. Unfortunately, this is a weird little function that doesn’t do what you expect it to do. One would think that the AccrInt (which stands for accrued interest) function would do the job and that we wouldn’t ever want to do it any other way.
Calculate Accrued Interest Using the AccrInt Function There are at least three ways to calculate accrued interest in Excel while using the correct day count basis. In the formulas below, all of the data will come from these cells in my sample spreadsheet. Here is the relevant information (all data was retrieved from FactSet on 17 June 2015): The Example Bondįor our calculations below, I will use the Oracle 5.75’s of 2018 (CUSIP: 68389XAC9). The important thing for our purposes here is to understand that how you count the days will affect the day count fraction, and so it affects the amount of accrued interest. Treasury notes and bonds use the actual/actual day count basis. In the U.S., we use 30/360 for corporate and municipal bonds, while U.S. The day count basis that is to be used will be specified in the indenture (i.e., the contract). The difference between them is in the details, and they often give the exact same day count. I’m leaving out some of the detailed rules, but know that there is more than one 30/360 day count convention. This is the “30/360” day count convention. Further, since there were 12 months in a year, they agreed that there were 360 days in a year. However, before computers it was a pain to count the actual number of days, so in some cases people agreed to assume that there were 30 days in every month (even February). The obvious way to do this is to count the actual number of days, which gives us a day count convention known as “actual/actual.” In a nutshell, we have to be able to count the number of days in a month and the number of days in a year. The particular rule used is known as the day count convention. Primarily for historical reasons, there are several ways to do this. In both the numerator and denominator of the day count fraction we have to calculate the number of days between two dates. \Īnd this is where things get a little bit more complicated. Mathematically, we would do the calculation as: For example, if a bond pays $25 in interest each six months, then you would earn about $0.1389 each day (assuming 180 days in six months). Interest does not compound during the coupon period.
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Therefore, the buyer of the bond must pay the accrued interest to you, and then they will get a full period of interest at the next coupon date. If you sell the bond, you would want to get the interest that you have earned, and you can’t get it from the issuer. If you own a bond, and some time has passed since the last coupon payment then you have earned some interest. This means that, if you use the PV function, your valuation will be incorrect on the other 363 (or so) days each year.īonds prices are quoted “ clean.” That is, they are quoted without accrued interest, which must be paid in addition to the quoted price. The problem with this is that usually there are only one or two coupon dates per year.
If that is the case, then you can use the PV function to find the price (though there is another hidden assumption in there: that the yield curve is flat). Typically in finance textbooks, bond valuation is discussed with a hidden assumption: that you are valuing the bond on a coupon payment date.
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