For a type of obligation such as a bond, interest is calculated and paid at set intervals (for instance annually or semi-annually).
However ownership of bonds/loans can be transferred between different investors at any time, not just on an interest payment date.
In other words, the previous owner must be paid the interest that accrued before the sale.
This is generally done in one of two ways, depending on market convention: On the other hand, if the sale is made during a short set period immediately before the next interest payment, then the seller, not the buyer, will receive the interest payment from the issuer of the loan (the borrower), and In accounting, accrual-based accounting generally requires (in order to present a true and fair view) that accrued interest is computed and recorded at the end of each accounting period, perhaps by means of adjusting journal entries.
The primary formula for calculating the interest accrued in a given period is:
The main variables that affect the calculation are the period between interest payments and the day count convention used to determine the fraction of year, and the date rolling convention in use.