Accrued Interest Calculator

Accrued Interest Formula

Accrued Interest (AI) = Principal (P) × Rate (r) × Time (t)

• P: The principal amount (the initial amount of money).
• r: The annual interest rate (as a decimal).
• t: The time the money is invested or borrowed, in years.

Example

For instance, if you have a principal of $1,000, an annual interest rate of 5% (0.05), and the time period is 3 months (0.25 years), the accrued interest would be calculated as follows:

Accrued Interest (AI) = $1,000 × 0.05 × 0.25 = $12.50

This means that $12.50 of interest has accrued over the 3-month period.

Example with Days

Suppose you have the same principal of $1,000, an annual interest rate of 5% (0.05), and the time period is 30 days. To calculate the accrued interest over 30 days, convert the time into years:

Accrued Interest (AI) = $1,000 × 0.05 × (30/360) ≈ $4.17

Accrued Interest Meaning

Accrued interest is the interest that accumulates on a loan, bond, or investment between payment dates. It represents the amount of interest that has been earned or incurred but has not yet been paid. Understanding accrued interest is crucial for both borrowers and investors as it affects cash flow and the overall return on investment.

Key Points

• For Borrowers: Accrued interest adds to the total amount owed on a loan. Knowing how much interest has accrued can help borrowers manage their finances effectively.
• For Investors: Investors earn interest on their investments over time. Accrued interest reflects the earnings that will be received upon payment, which is essential for assessing investment performance.
• Payment Timing: Accrued interest can be particularly important in contexts where payments are made periodically, such as bonds or loans, as it affects the total amount that needs to be paid at each interval.

Real-World Example

For example, if you own a bond that pays interest semi-annually, the interest you earn between payment dates is accrued interest. When the payment date arrives, the accrued interest is added to the amount you receive, providing a clearer picture of your earnings over that period.