Accrued Interest

Accrued interest, abbreviated as AI, is the interest that has been earned on a financial investment or loan but has not yet been paid or received.  It represents the amount of interest that has accumulated over a certain period of time since the last interest payment date or since the inception of the investment or loan.

Accrued interest is important for both investors and borrowers

• Investors  -  Accrued interest represents the amount of interest income that investors have earned but have not yet received.  It is often accounted for in financial statements and tax calculations.
• Borrowers  -  For borrowers, accrued interest represents the amount of interest expense that has accumulated but has not yet been paid.  It is important for budgeting and financial planning purposes.

Accrued interest is typically recorded as a liability on the books of the borrower and as an asset on the books of the lender or investor until it is paid or received.  When the interest payment date arrives, the accrued interest is paid or received, and the accrued interest balance is reset to zero, starting the accrual process anew for the next interest period.

 

Accrued Interest Formula

\( NPV =  P \; i \; (AD \;/\; 365) \)

Symbol

\( AI \) = accrued interest

\( P \) = principle

\( i \) = intrest rate

\( AD \) = accrued duration