Glossary of Municipal Securities Terms

ACCRUED INTEREST

The dollar amount of interest, based upon the stated rate of interest, that has accumulated on a security from (and including) the most recent interest payment date (or, in certain circumstances, the dated date or other stated date), up to but not including the date of settlement of a transaction in such security. Accrued interest is paid to the seller by the purchaser. Accrued interest is usually calculated on the basis of a 360-day year (assuming that each month has 30 days), but alternative day counting methods (most commonly based on a 365- or 366-day year counting actual days elapsed) are used for many securities that bear interest at a variable rate and for certain other types of securities (e.g., some municipal notes). The formula for computing accrued interest based on a 360-day year is as follows:

Accrued Interest = Interest Rate  X  Par Value  X  Number of Days
                                                                               360

EXAMPLES:

(1) City Y sold a $10,000,000 new issue of municipal bonds on August 15. The bonds were dated June 1 and settled on September 15. The interest rate on the bonds was 4 percent.

On settlement date        =    .04  X  $10,000,000  X  104  =  $115,555.56
accrued interest paid                                               360
by underwriter

(2) Ms. Smith bought $100,000 of municipal bonds in the secondary market. The bonds had a 4 percent coupon rate and paid interest semi-annually on December 1 and June 1. Settlement date was April 12.

On settlement date        =    .04  X  $100,000  X  131  =  $1,455.56 
accrued interest                                                 360
payable by Ms. Smith

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