Accrual Bond

A bond is a financial instrument issued in the form of a loan made by an investor. It contains the details of the principal amount of the loan and periodic interest to be made by the borrower.

Accrual refers to the buildup or increase of one thing over a period of time.

Äccrual bond” is a bond type wherein the interest on the bond is not paid periodically but accumulated.

This increased interest over the period of time is paid in alignment with the principal amount to the bondholder at the maturity date.

Such type of interest payment is called Äccrued Interest” since the earned interest on the bond is not credited to the holder’s account until the maturity of the bond.

Interest gets accrued from the date the loan is issued or when the coupon of the bond is paid.

Interest on the bond is paid either quarterly, semi-annually, or annually.

Accrual bond is also known as “Z bond”.

For example, investor A purchases a bond with a face value of Rs. 1000 and a coupon rate of 5% paid twice a year. After 90 days investor A sells the bond to investor B. Investor A will receive the prevailing price of the bond plus the accrued interest, that is the regular payment adjusted for the time investor A owned the bond.

Interest calculated will be Rs. 50 for the entire year (Rs. 1000*5%) and investor A held the bond until the first quarter or 25% (90/360). Accrued interest sums up to (Rs.50 * 25%) Rs. 12.50. Investor A has to receive the current value of the bond in the market plus the interest of Rs. 12.50 of 90 days.

A “zero-coupon bond” is similar to an accrual bond since it does not pay periodic interest and is traded at a deep discount to the face value providing a profit at the maturity along with the principal amount when the bond is redeemed to its face value.

If an investor is not a risk-taker an accrual bond can work your purpose. It is easy to handle and there is no need to monitor the market frequently. Bondskart has a team of experts who can guide you at every step of investment to ensure you make an informed decision while making a bond investment.