Accrued Interest On Bonds: An Explanation Based On Brokers Preference For Clean Price Data With A Critique Of Intermediate Accounting Textbook Explanations

Abstract

By convention U.S. bond markets announce the actual price of a bond as the sum the quoted price plus accrued interest. The economic meaning of accrued interest and its role in this price announcing convention is generally misunderstood by accounting textbook authors who mistakenly provide accrued interest with both an economic and administrative explanation. A cogent rationale for the broker price announcing convention is offered which places accrued interest in its proper context. Explanations of accrued interest found in a sample of intermediate accounting textbooks are also critiqued. The concept of negative accrued interest is also briefly discussed.