And Interest

And interest is a slang phrase used by bond salespersons or brokers quoting the price of a fixed-income instrument to refer to the accrued interest. When discussing the price of a bond with a potential buyer, the broker will quote the clean price of the bond and then say, “and interest,” to remind the buyer that the price will be slightly higher to account for accrued interest. Because interest accrues at a regular interval, a buyer will know going into a transaction what the accrued interest owed will be.

Most bonds, whether they are issued by governments or corporations, entitle the holder of the bond to coupon payments, or interest payments, at regular intervals. Typically the issuer of the bond will make coupon payments once, twice or four times per year, depending on the issuer and the maturity of the bond issued. Though the bondholder only receives interest at these predetermined dates, a bond will rise in value on the open market

For example, let's examine a bond, selling at par, paying an annual coupon of $8, with a par value of $100. It has been exactly half a year since the bond last paid a coupon. If you wish to purchase this bond, the likely quote you will hear is "$100 and interest". The $100 represents the clean price of the bond. The "and interest" is equal to the accrued interest at the time of sale. Since the bond pays a coupon once a year, and half a year has passed, the "and interest" equals $4, or one-half of the coupon payment that will be issued six months from now.

Calculating accrued interest is an essential part of valuing bonds and understanding how brokers will calculate their quotes. Bonds are valued by calculating the present value of all the cash payments a bond promises. Because of the time value of money, the present value of a coupon payment is higher the nearer the date of the payment. This implied value becomes realized once the coupon payment is made, or if the bond is resold to a third party willing to pay this value for the accrued interest. The value of accrued interest for a given bond will depend on the number of coupon payments are made in a given year, the underlying interest rate of the bond, and the amount of time until the next coupon payment.