What is "accrued interest" in the context of bond payments?

Accrued interest refers to the interest that accumulates on a bond from the last coupon payment date up to, but not including, the date of the next payment. It represents the amount of interest that has been earned but not yet paid to the bondholder. This concept is essential for bond transactions, especially if a bond is sold between coupon payment dates.

When a bondholder sells a bond before its next coupon payment, the buyer owes the seller this accrued interest, as the seller holds a claim to the interest earned during the period they owned the bond. Therefore, the payment of accrued interest ensures that the party who held the bond for the period leading up to the sale receives the interest due accordingly.

This understanding is vital for both investors and issuers within municipal finance, as it reflects the accurate financial obligations and the timing of cash flows related to bond investments.