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Debt & Yield Curvesbeginner

Settlement Date and Accrued Interest

The settlement date is the day on which the bond changes hands and the buyer pays the seller. Australian Government Bonds and US Treasuries both settle on T+1 following Austraclear and Fedwire reforms, while corporate bonds in most jurisdictions settle on T+2. Accrued interest is calculated from the last coupon date to the settlement date and added to the clean price. The buyer pays the dirty price at settlement and later receives the full coupon at the next coupon date.

Why it matters

When you buy a bond between coupon dates, you are stepping into a stream of payments mid-flight. The seller earned interest for the days they held the bond in this coupon period. You compensate them via accrued interest, paying the dirty price. Then, on the next coupon date, you collect the full coupon. Your net interest equals the coupon you receive minus the accrued you paid, which equals the interest earned over the days you actually held the bond.

Formulas

Settlement amount
Amount=FaceƗPclean+AI100\text{Amount} = \text{Face} \times \frac{P_{\text{clean}} + AI}{100}
PcleanP_{\text{clean}} is the quoted price per 100 face. AIAI is accrued interest per 100 face. Multiply by face value to get cash settlement.
Accrued interest with day count
AI=CƗDsinceDperiodAI = C \times \frac{D_{\text{since}}}{D_{\text{period}}}
CC is the current period's coupon. Day-count convention varies. Use ACT/ACT for AGS and US Treasuries, 30/360 for US corporates and many euro corporates.

Worked examples

Scenario

Clean price quoted at $98.50$ per $100$ face. Accrued interest is \text{A\}1.20$ per $100$ face. Buy A$500,000 face value.

Solution

Dirty price =98.50+1.20=99.70= 98.50 + 1.20 = 99.70 per $100$ face. Settlement amount = 500{,}000 \times 99.70/100 = \text{A\}498{,}500$. The buyer wires A$498,500 today and will receive the next full coupon on its payment date.

Scenario

A US Treasury Note with $4\%$ semi-annual coupon, $100$ face value, trades at a clean price of $99.25$. Settlement is 35 days into a 182-day coupon period. Compute the dirty price for a US$1,000,000 face purchase.

Solution

Semi-annual coupon = 4/2 = \text{US\}2.00$ per $100$ face. Accrued = 2.00 \times 35/182 = \text{US\}0.385$ per $100$ face. Dirty price =99.25+0.385=99.635= 99.25 + 0.385 = 99.635 per $100$. Settlement amount = 1{,}000{,}000 \times 99.635/100 = \text{US\}996{,}350$.

Common mistakes

  • āœ—You only pay the quoted price. The quoted (clean) price is for comparison purposes. The cash that actually settles is the dirty price, which includes accrued interest. Forgetting accrued causes systematic underpayment errors in trade reconciliation.
  • āœ—Accrued interest is taxed as the buyer's income. In most jurisdictions, including Australia, accrued interest paid is treated as a reduction in the bond's cost base and the full coupon received is income, netting out to the actual holding-period interest. Treatment varies, check ATO Tax Determination TD 96/30 for AUD specifics.
  • āœ—Settlement is always T+2. Both Australian Government Bonds (via Austraclear) and US Treasuries moved to T+1 in 2024 to align with the US securities market's shift. Corporate bonds in most markets still settle T+2, and some emerging market sovereigns settle T+3.

Revision bullets

  • ā€¢Trade date ā†’\to settlement date (T+1 for AGS and UST, T+2 for most corporates)
  • ā€¢Clean price is the quoted figure
  • ā€¢Dirty price == clean ++ accrued, paid at settlement
  • ā€¢Accrued prorates the next coupon by days held
  • ā€¢Day-count is ACT/ACT for AGS and US Treasuries
  • ā€¢Buyer recoups accrued on the next coupon date

Quick check

The cash amount actually paid by a bond buyer at settlement equals

Australian Government Bonds settle on

Connected topics

Bond Price

In learning paths

Fixed Income & Rates Path

Sources

  1. Hull (2022), Ā§4.4
    Hull, John C. Options, Futures, and Other Derivatives. 11th ed. Pearson, 2022. ISBN 978-0-13-693997-9.
    Bond pricing chapter covering clean and dirty price conventions and accrued interest computation.
  2. Fabozzi (2021), Ch. 3
    Fabozzi, Frank J. Bond Markets, Analysis, and Strategies. 10th ed. MIT Press, 2021. ISBN 978-0-262-04627-3.
    Detailed treatment of settlement mechanics, accrued interest, and day-count conventions across markets.
  3. ICMA Day Count Appendix
    International Capital Market Association. ICMA Primary Market Handbook, Appendix A5 Day Count Fraction. ICMA, March 2022.
    Reference for ACT/ACT and 30/360 conventions used worldwide in accrued interest calculations.
  4. AOFM Treasury Bonds
    Australian Office of Financial Management. Treasury Bonds. AOFM, accessed 2026.
    Official source on AGS issuance, settlement, and the Austraclear platform.
  5. SEC T+1 Settlement
    U.S. Securities and Exchange Commission. SEC Adopts Rule Amendments to Shorten the Standard Settlement Cycle to T+1. SEC Press Release 2023-29.
    Regulatory background to the May 2024 shift to T+1 settlement in US securities markets, including Treasuries.
How to cite this page
Dr. Phil's Quant Lab. (2026). Settlement Date and Accrued Interest. Derivatives Atlas. https://phucnguyenvan.com/concept/settlement-accrued-interest
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