The term accrued interest appears in connection with the purchase or sale of a fixed-income security between two interest payment dates. Anyone who buys a fixed-income security is entitled to the interest rate set in connection with the paper, as long as the investment is in the possession of the buyer.

- Accrued interest is the amount that the seller of a security receives for the period from the last interest date to the time of sale.
- According to German tax law, the seller or seller of the bond is obliged to pay tax on the accrued interest. The buyer also has to pay tax on his interest portion.

## What is accrued interest?

The term “accrued interest” is used in connection with bonds, annuities, mortgage bonds, bonds or other securities that are suitable for buying or selling. The interest payment dates for accrued interest are usually set once a year. Not every investor buys a bond as part of the issue and not every investor holds the bond in the custody account until the time of repayment . The seller is therefore entitled to compensation for the interest for the period between the payment dates for which he kept the paper in the custody account. With the following interest payment, the buyer receives the income for the entire previous interest year. According to abbreviationfinder, AIR stands for Accrued Interest Receivable.

## The calculation of accrued interest

An investor sells a bond for 10,000 euros with an interest rate of three percent 90 days after the last interest payment. From this it follows that he is entitled to interest for these 90 days, which the buyer has to pay to him. The simple interest formula, which is based on 360 days for a year, is used for the calculation. For one year, the investor receives EUR 300 in interest, which can be determined using a simple rule of three: nominal value of the bond x interest rate / 100, i.e. EUR 10,000 x 3.0 percent / 100 = EUR 300.

The seller is now entitled to proportional interest for 90 days. This results in the following: (300 euros / 360 days (entire year)) x * 90 days (pro rata) = 75 euros that the buyer of the paper has to pay to the seller.

### Formula for calculating the accrued interest

Alternatively, the accrued interest can also be calculated using a formula (without an intermediate step):

**Accrued interest = nominal value of the bond x interest rate x interest days / (360 x 100)**

To calculate the interest, this results in the following formula: 10,000 euros x 3.0 percent x 90 days / (360 x 100) = 75 euros.

## The price of the bond on the stock exchange

With regard to accrued interest, there are two methods of quoting prices for fixed-income securities:

- Cum Coupon: The value of the accrued interest is taken into account in the stock exchange price.
- Ex Coupon: The market value is given “net” without the interest component in the market value of the paper. This variant avoids changes in exchange rates, which only result from the share of accrued interest.

## The taxation of accrued interest

The taxation of accrued interest takes place via the accrued interest pot. This term is understood to be an accounting quantity within the framework of the so-called tax pots. A bank maintains these tax pots for each of its customers’ securities accounts and offsets the respective profits and losses in order to correctly determine the withholding tax due at the end of the year. In the accrued interest pot, received and paid accrued interest are netted.

Since the interest on a security is considered “income from capital”, both the seller and the buyer of the security are required to pay tax on the interest received (pro rata). Accrued interest is subject to the withholding tax in accordance with German tax law.

The buyer is entitled to deduct the amount of the accrued interest paid to the seller from the total interest income. Accordingly, he only taxes the interest income accruing from his time in possession of the security. The accrued interest paid to the seller reduces the income from capital assets.

## What is negative accrued interest?

For the buyer of a security, the accrued interest to be paid to the seller is not part of the cost of the acquired investment. For him, the accrued interest is what is known as negative income. When buying a fixed income security, accrued interest is recorded as a loss because it reduces the overall profit of the security.