InvestorQ : What is the concept of the broken period interest as regards the Debt Market?
Aashna Tripathi made post

What is the concept of the broken period interest as regards the Debt Market?

Answer
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Tisha Malhotra answered.
1 year ago


The concept of the Broken Period Interest or the accrued interest arises as interest on bonds is received after certain fixed intervals of time to the holder who enjoys the ownership of the security at that point of time. Therefore an investor who has sold a bond which makes half-yearly interest payments three months after the previous interest payment date would not receive the interest due to him for these three months from the issuer. The interest on these previous three months would be received by the buyer who has held it for only the next three months but receive interest for the entire six month periods as he happens to be holding the security at the interest payment date.

Therefore, in case of a transaction in bonds occurring between two interest payment dates, the buyer would pay interest to the seller for the period from the last interest payment date up to the date of the transaction. The interest thus calculated would include the previous date of interest payment but would not include the trade date.