What is Accrued Interest? Definition and How to Calculate

What Is Accrued Interest?

By Mike Price – Updated Oct 8, 2025 at 2:09 AM EST

Key Points

Accrued interest grows daily and varies if paid off early, affecting loans and credit costs.
Monthly accrued interest is calculated using the average daily balance method.
Bond sellers should include accrued interest in their price to reflect unpaid earnings.

Accrued interest is the amount of interest owed on a loan that has accumulated but not yet been paid. If you take out a mortgage or make purchases on a credit card, you are typically charged interest in exchange for having access to funds.

On the other hand, if you purchase bonds, you lend money to the issuer and will receive interest payments at specified intervals. Accrued interest is the amount you are currently owed. It accumulates daily, and the amount due can vary depending on how early it's paid off.

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A graphic outlining three facts about accrued interest and how it works. — Image source: The Motley Fool

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Calculate monthly interest rate by dividing the annual interest rate by 12. — Image source: The Motley Fool

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Next, divide this amount by 100 to convert from a percentage to a decimal. For example, 1% becomes 0.01.

To determine the account's average daily balance, add up the principal balance on each day of the month and then divide by the number of days in the month. This is important to use with accounts that have fluctuating balances.

For example, if you had a $1,000 balance on an account for the first 10 days of a 30-day month and then borrowed an additional $500, your average daily balance would be:

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A hypothetical example of how to calculate average daily balance. — Image source: The Motley Fool

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If the account's principal balance did not fluctuate during the month, such as with a typical mortgage, the average daily balance is simply equal to the starting balance.

Finally, multiply the monthly interest rate by the average daily balance in order to calculate the interest that accrued during the month.

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Calculate monthly accrued interest by multiplying the monthly interest rate by the average daily balance. — Image source: The Motley Fool

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Let's say you have a loan account with the same $1,333 average daily balance as we calculated in the earlier example. If your interest rate is 18%, we can calculate your monthly interest rate and convert it into a decimal as follows:

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A hypothetical example of how to calculate monthly interest rate. — Image source: The Motley Fool

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Multiplying by the average daily balance gives us monthly accrued interest of:

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A hypothetical example of how to calculate monthly accrued interest. — Image source: The Motley Fool

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Fiscal Quarter

In the financial world, a quarter refers to a three-month period used for reporting and recording financial performance, typically representing one-fourth of a company's fiscal year.

Let's say you have a bond position worth $10,000. It has an annual coupon rate of 5% and it makes payments every six months. You want to sell it, but it has been two months since the last payment, so you need to calculate your unpaid interest as of the settlement date.

To do this, you'll need to figure out the monthly interest owed and multiply it by two. The formula is $10,000 x .05 / 12 = $41.67. This means you have $83.33 of accrued interest. Make sure when you sell the bond that you take that number into account.

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About the Author

Mike Price is a 23 year-old Masters of Finance graduate who first started learning about investing on the Motley Fool when he was 13. He is currently seeking a job.

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