The first question worth answering is one most explainers skip entirely: why do bond markets quote clean prices but settle at dirty prices? The answer reveals more about how fixed income markets actually work than the formula does.
If markets quoted dirty prices, every bond’s quote would rise predictably each day as accrued interest accumulated, then drop sharply on coupon dates as accrued reset to zero. Price screens would show sawtooth patterns driven entirely by the calendar, with the actual market signal – yield movements, credit spread changes, supply and demand – buried inside this mechanical noise. Quoting clean prices strips out the calendar and leaves the market signal exposed.
Settling at dirty prices solves the opposite problem. If trades settled at clean prices, a buyer purchasing the day before a coupon would pocket the full coupon for owning the bond 24 hours. A seller who held for five months would receive nothing. The market would respond by manipulating trade dates around coupon payments – destroying the liquidity that makes secondary markets work.
The clean/dirty convention is not a quirk. It is a careful design that separates two information needs: what the bond is worth in the market (clean) and what cash should change hands today (dirty). Everything in this guide builds on that distinction.
This guide covers the four day-count conventions used across global bond markets, ex-dividend periods and negative accrued interest in UK gilts, how the May 2024 US T+1 transition affects accrual mechanics, what happens to accrued interest when a bond defaults, repo and swap applications, the US accrued interest tax deduction election, and IFRS 9 / GAAP financial reporting treatment.
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Different bond markets use different methods to count the days that go into the accrued interest calculation. The choice between conventions can produce material differences on large portfolios – and is a frequent source of settlement breaks between counterparty systems.
Both numerator and denominator use actual calendar days. Days since last coupon = exact calendar count. Days in period = exact calendar count of the current full coupon period.
For a semi-annual bond, the period denominator varies: 181 days for periods spanning February (in non-leap years), 182-184 days for other six-month periods. ACT/ACT is the most precise convention because it reflects true calendar reality.
Markets: US Treasuries, UK gilts, most government bonds globally, supranational issuers, certain Eurobonds.
Every month is treated as having exactly 30 days; every year as having 360. A coupon period from 15 February to 15 August is treated as 180 days (6 × 30) regardless of actual calendar length.
The 30/360 family has multiple variants that handle end-of- month dates differently:
The variants produce identical results for most cash flows but differ at month-end edge cases (28/29 February, 30/31 of any month). System reconciliation breaks between dealers often trace back to different 30/360 implementations.
Markets: US corporate bonds (most issues), Eurobonds, many emerging market sovereigns, swap fixed legs.
Actual elapsed days, divided by 360. The 360-day year is shorter than calendar reality, so accrued interest under ACT/360 is slightly higher than under ACT/365 for the same elapsed days.
The convention reflects historical money market practice in the US and persists despite making no calendar sense. On a 30-day period at 5% on $10,000,000:
The $571 difference is small in isolation but adds up across institutional portfolios.
Markets: US Treasury bills, US commercial paper, USD certificates of deposit, USD interest rate swap floating legs, USD repo, SOFR and most USD floating-rate notes.
Actual elapsed days, divided by 365 (or 365.25 in some leap-year-adjusted variants). More accurate to calendar reality than ACT/360.
Markets: UK gilts repo, sterling money markets, Australian and New Zealand fixed income, certain Asian markets including Hong Kong dollar instruments.
| Transaction | Day-count convention |
|---|---|
| US Treasuries cash trades | ACT/ACT |
| US corporate bond cash trades | 30/360 |
| US Treasury repo | ACT/360 |
| USD interest rate swap fixed leg | 30/360 |
| USD interest rate swap floating leg | ACT/360 |
| UK gilts cash trades | ACT/ACT |
| UK gilts repo | ACT/365 |
| Eurobonds (most) | 30E/360 |
| EUR interest rate swaps | ACT/360 |
The mismatch between conventions on different parts of the same product creates “convention spreads” that practitioners absorb in pricing without separately discussing.
Some bond markets – UK gilts most prominently – operate an ex-dividend mechanism in the days immediately before each coupon payment. This produces accrued interest behaviour that surprises practitioners moving between markets.
Each bond has an ex-dividend date set a fixed number of days before each coupon date. UK gilts use a 7-day ex-dividend period. Some corporate bond markets use 3-5 days. US Treasuries and most US corporate bonds have no ex-dividend period (effectively 0 days).
Trading conventions:
Cum-coupon (cum-dividend) – trades settling before the ex-dividend date. The buyer becomes entitled to the upcoming coupon. Accrued interest is positive – the buyer pays the seller for accrual to date.
Ex-coupon (ex-dividend) – trades settling on or after the ex-dividend date but before the coupon date. The seller retains entitlement to the upcoming coupon (the registrar pays the holder of record on the ex-date close). The buyer’s accrued interest is negative – the seller pays the buyer to compensate for the imminent coupon the buyer will not receive.
A 4% UK gilt, semi-annual coupons, with a coupon date of 15 May 2026. The 7-day ex-dividend cutoff is 8 May 2026.
A trade settling 12 May 2026 (4 days into the ex-dividend period, 3 days before the coupon):
The “accrued interest” line on the settlement confirmation shows a negative number. The seller’s settlement proceeds are reduced by this amount.
Trade booking systems configured for US markets – where accrued is always positive – sometimes fail to handle negative accrued correctly when processing UK trades. Operations teams running gilt trades through US-trained systems frequently encounter reconciliation breaks in the ex-dividend window. The fix is system-side, but practitioners need to know the convention exists to diagnose the problem.
The May 2024 US securities settlement transition from T+2 to T+1 was a significant operational change that subtly affects accrued interest calculation in practice – though not the underlying methodology.
Pre-May 2024: A trade executed on Monday settled on Wednesday. Accrued interest was calculated to Wednesday’s date – two days of accrual after the trade.
Post-May 2024: A trade executed on Monday settles on Tuesday. Accrued interest is calculated to Tuesday’s date
The accrued interest amount per trade is therefore lower under T+1, by approximately one day’s worth of coupon income.
For individual trades the difference is marginal – typically a few cents on a $10,000 trade. The operational impact is in three areas:
Real-time accrual reporting. Systems that calculate expected accrued for trade tickets must use T+1 instead of T+2 for US securities. Configuration errors that produce T+2 accrued post-May 2024 result in dealer reconciliation breaks.
Cross-market trades. International trades involving US Treasuries on one leg and other markets on a different settlement cycle now have a one-day mismatch in accrual windows. This affects basis trades and arbitrage strategies where precise cash flow alignment matters.
Funding cost analysis. With one fewer day between trade and settlement, the funding cost embedded in dealer prices shifts marginally. Yield analysis comparing pre- and post- T+1 prices must adjust for this.
The accrued interest calculation methodology itself is identical. Day-count conventions, accrual mechanics, ex-dividend periods – all unchanged. Only the gap between trade and settlement is shorter.
When a bond issuer defaults – fails to make a scheduled interest or principal payment – the entire framework around accrued interest changes.
Accrued interest typically stops accumulating at the default date. The bond enters distressed status where its market value reflects expected recovery rather than scheduled cash flows. Future coupon payments become uncertain claims rather than contractual entitlements.
Distressed bonds trade “flat” – the quoted price is the total settlement amount with no separate accrued component. This convention applies because:
Future coupons are uncertain. Accrued interest on coupons that may never be paid has questionable economic value. Pricing it as if it were certain misrepresents the bond’s real value.
Recovery treatment varies. In bankruptcy proceedings, accrued interest may be subordinated to principal claims, treated equally with principal in the unsecured claim, or disallowed entirely depending on jurisdiction and the specific reorganisation. Pre-default accrued interest does not have the same recovery profile as post-default principal.
Buyers are buying recovery, not income. Distressed debt investors price bonds based on expected recovery from restructuring. Coupon mechanics are noise within the recovery analysis.
Different bond market conventions trigger flat trading at slightly different points:
The CDS (credit default swap) market has formal procedures through ISDA’s Credit Determinations Committee for declaring credit events. The cash bond market often follows CDS determinations but is not strictly bound by them.
When a defaulted bond emerges from restructuring with clarified cash flow terms – typically through a debt exchange where old bonds are replaced with new bonds – the new bonds revert to standard cum-coupon trading with accrued interest calculated against the restructured coupon schedule.
The original defaulted bonds may continue to trade flat through the bankruptcy process until the exchange completes.
Repurchase agreements settle at dirty prices because the cash lender receives the full economic interest in the bond, including accrued coupon income, as collateral. Two specific repo mechanics interact with accrued interest in ways that matter.
If a coupon is paid during a repo’s term, the legal owner of the bond receives it – and the legal owner during the repo is the cash provider, not the cash borrower. This creates a problem: the cash borrower (who originally owned the bond and will own it again at the second leg) loses their right to that coupon.
The market solution is the manufactured payment. The cash provider receives the coupon and is contractually obligated to pass an equivalent payment back to the cash borrower at the same time. The economics replicate what would have happened without the repo: the cash borrower receives the coupon income as if they had held the bond throughout.
The legal mechanics differ from a direct coupon. In some jurisdictions, manufactured payments are subject to different tax treatment (often less favourable) than direct interest income. Sophisticated repo participants plan trade timing to avoid coupon payment dates falling within repo terms when possible.
A repo crossing a coupon payment date has unusual cash flow mechanics:
The cash borrower’s net economic position is identical to holding the bond throughout – receiving the coupon, paying repo interest. But the cash flows are reorganised. Repo documentation specifies how manufactured payments work and any tax adjustments required.
When using this site’s repo calculator with a transaction crossing a coupon date, the value of repo input should reflect the dirty price at first leg settlement. The manufactured payment is operational – it does not change the repo’s interest calculation, which runs on the value of repo over the full term.
Tax treatment varies by jurisdiction but follows similar principles in most developed markets. The key concept is that accrued interest paid by the buyer is not deductible as an expense – it is a return of capital that adjusts the buyer’s tax basis in the bond.
When buying a bond between coupon dates, the buyer pays accrued interest to the seller. When the next coupon arrives, the buyer receives the full coupon – including the portion they effectively bought from the seller. In the absence of any adjustment:
This produces double taxation on the seller’s pre-existing income claim.
US tax law (IRC §171 and related provisions) allows a specific election to address this. The buyer can elect to:
Once elected, the treatment must be applied consistently across all subsequent bond purchases. The election is typically beneficial for taxable accounts but has no effect for tax-exempt accounts (where the income is exempt regardless).
For practitioners managing taxable bond portfolios, making this election early in the relationship with the IRS is operationally simpler than not making it – without the election, the accrued interest paid creates tracking complexity through the bond’s holding period.
UK: Accrued interest paid is treated as a capital adjustment to the bond’s base cost. Coupons received are taxable as interest income. The treatment is similar in effect to the US election but is automatic rather than elective.
Most EU jurisdictions: Similar capital adjustment treatment with country-specific variations. France, Germany and the Netherlands have specific rules that broadly produce the same economic outcome.
Tax-exempt bonds (US municipals): Accrued interest on tax-exempt bonds is itself exempt from federal tax. The adjustment to basis still applies for capital gain/loss calculations on later sale.
Financial statement presentation of accrued interest follows specific rules that affect how analysts read bond holdings.
Bonds carried at amortised cost (typically banking book hold-to-maturity positions) are reported at clean amortised cost plus accrued interest receivable, often combined into a single “carrying value” figure that equals the bond’s dirty value.
Bonds at fair value through profit or loss (trading book) are reported at dirty fair value, with the accrued interest component embedded in the position’s market value.
Bonds at fair value through other comprehensive income (typically available-for-sale category) follow similar dirty-price treatment.
GAAP presentation typically separates accrued interest more prominently. Held-to-maturity securities are reported at amortised cost with accrued interest receivable as a separate line item. Trading and available-for-sale securities are at fair value with accrued embedded or separately disclosed depending on the entity’s accounting policies.
When analysing bank bond portfolios across reporting periods or across institutions, the clean-vs-dirty presentation distinction can create apparent differences that are accounting artefacts rather than economic substance. A bank that breaks out accrued interest separately may appear to have a “smaller” bond portfolio than one that combines it into the bond carrying value, even when the underlying positions are identical.
For accurate analysis, always reconcile to dirty value across the comparison set. Total economic exposure includes accrued interest regardless of presentation.
Because the two prices serve different information purposes. Clean prices isolate market valuation from the calendar – comparing 98.50 yesterday to 98.50 today tells you the market view has not changed. Dirty prices reflect total economic value at a moment in time, including unpaid interest accrued to the holder. Quoting clean prices prevents the calendar from contaminating market signals. Settling at dirty prices ensures fair compensation between buyer and seller for the seller’s accrued income claim.
Day-count convention mismatches. Two systems using different variants of 30/360 (Bond Basis vs ISDA vs European) will produce slightly different accrued figures on the same bond at the same settlement date. The differences are rounding-level on individual trades but become material across institutional portfolios. The fix is configuration alignment, not calculation correction.
The methodology is unchanged but the gap between trade date and settlement date is shorter under T+1 than T+2. For a US securities trade, accrued interest under T+1 includes one day of accrual after the trade rather than two. The amount per trade is marginally lower. Practitioners must configure trade booking systems to use T+1 settlement dates for US securities post-May 2024.
Three common causes. First, day-count convention – Bloomberg uses the convention specified in the bond’s prospectus, which may not be Actual/Actual. Second, settlement date – Bloomberg adds T+1 or T+2 to the trade date automatically. Third, ex-dividend status for UK gilts and similar markets where accrued can be negative. Confirm all three before assuming a calculation error.
Accrued interest typically stops accumulating at the default date. The bond moves to flat trading where the quoted price is the total settlement value with no separate accrued component. Pre-default accrued interest becomes part of the unsecured claim against the issuer in bankruptcy proceedings, with recovery dependent on the restructuring outcome.
Yes. YTM calculations should use the dirty price as the investment amount. Using clean price understates the cash actually invested and overstates the implied yield by 5-15 basis points typically. For precision yield analysis – particularly when comparing bonds traded at different points in their coupon cycles – dirty-price YTM is the only correct approach.
Macaulay and Modified Duration calculations should use dirty price as the denominator in cash flow weighting. Using clean price produces small but systematic underweighting of near-term cash flows. The convention across professional duration calculators is dirty price.
Zero-coupon bonds – bonds that pay no periodic interest – have no accrued interest mechanism. Their dirty price equals their clean price by definition. Floating-rate notes between reset dates do accrue interest but at the current floating rate, which may differ from the rate that will apply for the rest of the period. Inflation- linked bonds accrue both real coupon and inflation adjustment, requiring more complex calculations than covered here.
Either the brokers use different day-count conventions (possible if the bond’s documentation is ambiguous), different settlement date assumptions, or different ex-dividend treatment. Differences of more than a few cents on a $10,000 trade warrant requesting a calculation breakdown from each broker before settling.
Use the free Bond Accrued Interest & Dirty Price Calculator Six inputs – clean price, settlement date, coupon rate, nominal, maturity date, frequency. Instant accrued and dirty price output. Handles odd periods automatically.
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Bond Duration Calculator – Macaulay Duration and Modified Duration both use dirty prices internally for accurate cash flow weighting
Repo & Reverse Repo Explained –repo settlements use dirty prices; manufactured payments handle coupons during repo terms
Effective Duration Explained –interest rate sensitivity for option-embedded bonds using dirty-price-based pricing
Bonds and Fixed Income Fundamentals –the complete structural guide to bond markets, yields and how interest rates interact with bond pricing