Accrual rate is the percentage interest rate applied to the remaining principal on a loan. The concept is used to determine the amount of interest expense accrued between interest payments. The accrual rate is commonly used on bonds, since these financial instruments usually only pay interest at intervals of once every six months, and the interest expense must be determined during the intervening periods.
For example, a bond has just paid interest for the six months ended June 30. The controller of the issuer needs to accrue interest expense for the month of July, and so uses an accrual rate of 8% to calculate the interest expense for this additional period.
The accrual rate term is also used in other areas, as follows:
- Vacation. An employee manual may state that employees earn vacation time at a rate of 3 hours per 100 hours worked. The rate at which vacation time is earned is called an accrual rate.
- Pension. Participants in a company pension plan earn pension benefits at a certain rate, which is the accrual rate.