Accumulated interest – What is it, definition and concept | 2022

Accumulated interest is the interest generated in a given period of time and that has not been paid to the corresponding creditor.

In the financial and accounting field, the concept of accrued interest refers to the volume of interest pending payment at a given time.

This income that is incurred and has not been satisfied at a certain point in the payment or installment schedule.

When undertaking a certain investment or financing, it is necessary to take into account the assumption of a volume of interest generated.

That said, the interest that is generated or accumulated can be paid or satisfied in each installment or at the expiration of the credit or loan.

They are arranged in payment schedules that consist of the union of a return of a principal plus interest calculated according to different criteria.

Main features of accrued interest

This type of interest has some characteristics to take into account:

  • Different perspective: Accountingly, these interests can be considered as expenses (for the borrower) or as income (for the lender)
  • Calculation element: Conceptually, accrued interest can be found at compound interest rates. That is, that interest calculated on a principal and interest pending payment.
  • Duration Relevance: In long-term loans or credits, it is usual to assume a higher level of interest and, therefore, higher volumes of accumulated interest.
  • Collection requirement: On occasions, the creditor entities establish incentives for the payment of periodic interest and the reduction of its accumulation. However, the payment schedule is agreed upon at the beginning of each loan.
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On the other hand, in the economic and financial day-to-day it is also common to call these interests as accumulated returns, especially in credit language.

Accumulated interest and bonuses

In the specifically investment field, it is common to find this name. This happens in cases where bond interest accrues.

They are subsequently paid through a bond interest payment process. The calendar that establishes them depends on each financial institution.

The most common formula is the payment of interest by means of semi-annual coupons.

This is the case in other types of securities such as fixed income. When a title is acquired, it is necessary to pay its market price in the market, additionally those interests born from the last date on which it was paid.

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