5 Key Facts About Earned, Accrued and Paid Interest

Understanding the different types of interest can help with investment management. Of particular note are earned, accrued and paid interest. With a platform like Yieldstreet, for example, potential interest earned and accrued depends on the nature of the investment. However, accrued interest payments on an asset that pays monthly are forwarded to the investor on the prescribed payment date. 

Here, Yieldstreet shares five key facts about earned, accrued, and paid interest. The idea is to facilitate a greater understanding of these concepts and how they can help investors make more advantageous investment decisions. 

What is Earned Interest? 

1. Earned interest is that which is earned on an investment over a specific period. 

2. This figure can help investors determine the performance potential of an asset before making a purchase. 

3. The earned interest rate also helps an investor compare the prospective returns of a variety of investment options. 

4. To ensure accuracy, compounding must be taken into consideration when calculating the potential for earned interest over an extended period of time. 

5. Earned interest depends upon the amount of cash received when cash basis accounting is applied. 

What is Accrued Interest? 

1. Accrued interest is that which has been earned but not collected. 

2. In some situations, an asset can earn interest on a daily basis but not pay it until a designated period of time has elapsed, such as on a monthly basis. 

3. Calculating accrued interest helps bond investors ensure they are paid what they are owed. 

4. The overarching goal of measuring interest accrual is to ensure transactions are accurately recorded. 

5. Having an understanding of accrued interest is useful in terms of guiding the timing of buy and sell decisions.

What is Paid Interest? 

1. Paid interest represents the amount of a disbursement an investor receives. 

2. Accrual of interest stops once it is paid and a new accrual cycle begins. 

3. Ultimately, paid interest represents the investor’s actual return on the investment. 

4. This figure can help an investor determine whether or not holding on to an asset is beneficial in terms of achieving their financial goals. 

5. Paid interest also matters when crafting a tax strategy. For example, interest paid on many types of bonds is taxable. 

In Summary 

To recap, earned interest is the interest earned on an investment over a specific period. Accrued interest is that which an investment has earned, but has yet to be paid. Paid interest is that which an investor has received. 

Understanding these concepts and their implications is important in numerous ways. The earned interest rate can help an investor determine the performance potential of an asset. Understanding accrued interest can help guide the timing of buy and sell assessments. Paid interest can inform decisions regarding the performance of an investment, in terms of whether or not it is performing in a manner that is beneficial to an investor’s overall financial goals.

Source: Yieldstreet