What is accrued interest? Does the settlement amount include accrued interest in it?
Accrued interest refers to the interest that has accumulated on a bond since the last interest payment date. When a bondholder sells a bond between interest payment dates, they're entitled to receive the interest that has accrued from the last payment date up to the date of sale. However, since the next interest payment goes to the new owner, the buyer must compensate the seller for the accrued interest at the time of the sale. The settlement amount is indeed the sum that the buyer pays to acquire the bonds and is composed of both the market price of the Bond as well as the accrued interest.
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