What’s the Difference Between Earned, Accrued & Paid Interest?

April 26, 20236 min read
What’s the Difference Between Earned, Accrued & Paid Interest?
Share on facebookShare on TwitterShare on Linkedin

Key Takeaways

  • Also called interest balance, accrued interest is interest that an investment is earning but has not yet been collected. With bonds, it helps investors see whether they are getting the interest owed.
  • Earned interest is simply the rate of interest an investment is earning and can help investors determine an investment’s overall performance.
  • Paid interest is that which the investor has received into their account, the point at which interest is no longer accrued.

Understanding the different types of interest is important for managing your finances and investments effectively. When it comes to investing, it’s essential to differentiate between earned, accrued, and paid interest. Let’s take a closer look at these three types of interest and explain how they work.

What is Earned Interest?

Earned interest is simply the rate of interest an investment is earning. Knowing this interest rate is important because it can help investors determine an investment’s overall performance and how to invest in the future. With knowledge of the earned interest rate, the investor can assess the prospective returns of varying investment options.

If you invest $1,000 in an investment that earns 10% per year, for example, your earned interest that year will be 10%, or $100. You also need to consider compounding. From the example above, you earned 10% or $100 during that year. In the second year, you’ll earn interest on $1,100 (your initial investment plus the first year’s earning), which would be $110.

If the cash basis of accounting is used, the amount of interest earned will depend upon the amount of cash received. If the accrual accounting basis is concerned, the amount earned will be recorded regardless of the amount of cash received.

Knowing the rate of earned interest is important because it can help you determine the overall performance of an investment. As a result, you are able to evaluate the potential returns on different investment options.

What is Accrued Interest?

Also called interest balance, accrued interest is interest that an investment is earning but has not yet been collected. 

For example, with a savings account, interest on one’s balance accrues daily but is credited to the account at month’s end. In other words, while one’s savings earn accrued interest every day, the interest cannot be spent until the bank puts it in the account. A Yieldstreet investment that pays interest monthly works the same way. You accrue interest all month and you receive it on the payment date.

Accrued interest is important with bonds because it helps investors see whether they are getting the interest owed. With loans, interest accrual may begin when the loan is first received. For example, with private student loans and unsubsidized federal student loans, the lender adds up the interest on the loan between payments. 

Accrual accounting, used for accrued interest, necessitates that accounting transactions be acknowledged and recorded upon occurrence, independent of whether, at that time, payment is received or expended. The overarching goal of interest accrual is to make certain the transaction is recorded accurately in the correct period.    

Two key accrual accounting aspects include the revenue recognition principle and matching principle. According to the recognition principle, revenue should be recognized in the period in which it was earned, as opposed to when it was received.  The matching principle, meanwhile, requires that expenses should be recorded in the same period as the related revenues.

The calculation of accrued interest is as of the accounting period’s last day. For example, say interest is payable on the 20th of every month and the accounting period is the end of every calendar month. The month of April, then, will necessitate an accrual of 10 days of interest, from April 21-30. It is posted at month’s end as part of the adjusting journal entries, which are general-ledger entries that occur at an accounting period’s end. 

Also, consider that a $20,000 loan receivable carries a 7.5% interest rate on which there has been receipt for payment through the month’s 20th day. The calculation to record the additional amount of interest revenue earned from the 21st of the month through the 30th would be (7.5% x (10/365)) x $20,000 = $41.10. 

Regarding bonds, accrued interest is the amount of bond interest accumulated since the last time a bond interest payment was made and is an important consideration. Bond owners are compensated in the form of regular interest payments for the money they have lent. Such payments are usually paid semi-annually and are also called coupons.

This is an important concept to know if you plan to buy or sell investment assets between payment dates.

What is Paid Interest?

Paid interest is simply interest paid to the investor. Another way to say it is that it is the interest the investor has received into their account, the point at which interest is no longer accrued.

The importance of this interest type is that it represents an investment’s actual return. This type of interest is important because it represents the actual return on your investment. Knowing the amount of paid interest can help you better understand how much you’re earning on your investment and whether it’s meeting your financial goals.

Investment Vehicles, Interest, and Tax Implications

Note that different investment types have varying tax implications. For instance, interest earned on most bonds and savings accounts is taxable. However, some types of accounts, such as some retirement accounts, permit investors to put off taxes on earned interest. Understanding investments’ tax implications can help investors make wiser investment decisions in accordance with their goals.

Take Yieldstreet, which has a broader selection of alternative asset classes than any other investment platform, opportunities of which include art, real estate, structured notes, transportation, legal finance, private credit, and more. Such private-market alternatives – Yieldstreet’s curated offerings are highly vetted – have historically performed better than stocks in every market downturn of at least the last 15 years. 

Potential interest earned and accrued depends on the investment with Yieldstreet, which offers an IRR of 9.6%.  Note that an investment with Yieldstreet that pays interest monthly accrues interest all month and is received by the investor on the payment date. 

Another benefit of adding alternative assets to one’s portfolio is diversification – a strategy in which investment holdings include a variety of asset types. Alternatives are particularly effective in this regard since they have no direct correlation to public markets, and so can mitigate portfolio volatility and, thus, risk. In fact, portfolio diversification is a foundational pillar of long-term investing success. Alternative investments can be a good way to accomplish this.  

Rise above Volatility

Diversify beyond the stock market with Yieldstreet.

Summary

It is important to know what earned, accrued, and paid interest are, and how the various interest types differ. Earned interest is the interest earned on your investment over a specific period, accrued interest is the interest that an investment is earning, but you haven’t received it yet, and paid interest is the interest that you have already received as payment. Knowing the difference between these types of interest can help you better manage your finances and investments.

Last but not least. It’s worth noting that different types of investments have different tax implications. For example, the interest you earn on most savings accounts and bonds is taxable. But some types of accounts, like certain retirement accounts, allow you to defer taxes on the interest you earn. Understanding the tax implications of your investments can also help you make more informed investment decisions.

We believe our 10 alternative asset classes, track record across 470+ investments, third party reviews, and history of innovation makes Yieldstreet “The leading platform for private market investing,” as compared to other private market investment platforms.

1 Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections may not reflect actual future performance. All securities involve risk and may result in significant losses.

3 "Annual interest," "Annualized Return" or "Target Returns" represents a projected annual target rate of interest or annualized target return, and not returns or interest actually obtained by fund investors. “Term" represents the estimated term of the investment; the term of the fund is generally at the discretion of the fund’s manager, and may exceed the estimated term by a significant amount of time. Unless otherwise specified on the fund's offering page, target interest or returns are based on an analysis performed by Yieldstreet of the potential inflows and outflows related to the transactions in which the strategy or fund has engaged and/or is anticipated to engage in over the estimated term of the fund. There is no guarantee that targeted interest or returns will be realized or achieved or that an investment will be successful. Actual performance may deviate from these expectations materially, including due to market or economic factors, portfolio management decisions, modelling error, or other reasons.

4 Reflects the annualized distribution rate that is calculated by taking the most recent quarterly distribution approved by the Fund's Board of Directors and dividing it by prior quarter-end NAV and annualizing it. The Fund’s distribution may exceed its earnings. Therefore, a portion of the Fund’s distribution may be a return of the money you originally invested and represent a return of capital to you for tax purposes.

5 Represents the sum of the interest accrued in the statement period plus the interest paid in the statement period.

6 The internal rate of return ("IRR") represents an average net realized IRR with respect to all matured investments, excluding our Short Term Notes program, weighted by the investment size of each individual investment, made by private investment vehicles managed by YieldStreet Management, LLC from July 1, 2015 through and including July 18th, 2022, after deduction of management fees and all other expenses charged to investments.

7 Investors should carefully consider the investment objectives, risks, charges and expenses of the Yieldstreet Alternative Income Fund before investing. The prospectus for the Yieldstreet Alternative Income Fund contains this and other information about the Fund and can be obtained by emailing [email protected] or by referring to www.yieldstreetalternativeincomefund.com. The prospectus should be read carefully before investing in the Fund. Investments in the Fund are not bank deposits (and thus not insured by the FDIC or by any other federal governmental agency) and are not guaranteed by Yieldstreet or any other party.

8 This tool is for informational purposes only. You should not construe any information provided here as investment advice or a recommendation, endorsement or solicitation to buy any securities offered on Yieldstreet. Yieldstreet is not a fiduciary by virtue of any person's use of or access to this tool. The information provided here is of a general nature and does not address the circumstances of any particular individual or entity. You alone assume the sole responsibility of evaluating the merits and risks associated with the use of this information before making any decisions based on such information.

9 Statistics as of the most recent month end.

300 Park Avenue 15th Floor, New York, NY 10022

844-943-5378

No communication by YieldStreet Inc. or any of its affiliates (collectively, “Yieldstreet™”), through this website or any other medium, should be construed or is intended to be a recommendation to purchase, sell or hold any security or otherwise to be investment, tax, financial, accounting, legal, regulatory or compliance advice, except for specific investment advice that may be provided by YieldStreet Management, LLC pursuant to a written advisory agreement between such entity and the recipient. Nothing on this website is intended as an offer to extend credit, an offer to purchase or sell securities or a solicitation of any securities transaction.

Any financial projections or returns shown on the website are estimated predictions of performance only, are hypothetical, are not based on actual investment results and are not guarantees of future results. Estimated projections do not represent or guarantee the actual results of any transaction, and no representation is made that any transaction will, or is likely to, achieve results or profits similar to those shown. In addition, other financial metrics and calculations shown on the website (including amounts of principal and interest repaid) have not been independently verified or audited and may differ from the actual financial metrics and calculations for any investment, which are contained in the investors’ portfolios. Any investment information contained herein has been secured from sources that Yieldstreet believes are reliable, but we make no representations or warranties as to the accuracy of such information and accept no liability therefore.

Private placement investments are NOT bank deposits (and thus NOT insured by the FDIC or by any other federal governmental agency), are NOT guaranteed by Yieldstreet or any other party, and MAY lose value. Neither the Securities and Exchange Commission nor any federal or state securities commission or regulatory authority has recommended or approved any investment or the accuracy or completeness of any of the information or materials provided by or through the website. Investors must be able to afford the loss of their entire investment.

Investments in private placements are speculative and involve a high degree of risk and those investors who cannot afford to lose their entire investment should not invest. Additionally, investors may receive illiquid and/or restricted securities that may be subject to holding period requirements and/or liquidity concerns. Investments in private placements are highly illiquid and those investors who cannot hold an investment for the long term (at least 5-7 years) should not invest.

Alternative investments should only be part of your overall investment portfolio. Further, the alternative investment portion of your portfolio should include a balanced portfolio of different alternative investments.

Articles or information from third-party media outside of this domain may discuss Yieldstreet or relate to information contained herein, but Yieldstreet does not approve and is not responsible for such content. Hyperlinks to third-party sites, or reproduction of third-party articles, do not constitute an approval or endorsement by Yieldstreet of the linked or reproduced content.

Investing in securities (the "Securities") listed on Yieldstreet™ pose risks, including but not limited to credit risk, interest rate risk, and the risk of losing some or all of the money you invest. Before investing you should: (1) conduct your own investigation and analysis; (2) carefully consider the investment and all related charges, expenses, uncertainties and risks, including all uncertainties and risks described in offering materials; and (3) consult with your own investment, tax, financial and legal advisors. Such Securities are only suitable for accredited investors who understand and are willing and able to accept the high risks associated with private investments.

Investing in private placements requires long-term commitments, the ability to afford to lose the entire investment, and low liquidity needs. This website provides preliminary and general information about the Securities and is intended for initial reference purposes only. It does not summarize or compile all the applicable information. This website does not constitute an offer to sell or buy any securities. No offer or sale of any Securities will occur without the delivery of confidential offering materials and related documents. This information contained herein is qualified by and subject to more detailed information in the applicable offering materials. Yieldstreet™ is not registered as a broker-dealer. Yieldstreet™ does not make any representation or warranty to any prospective investor regarding the legality of an investment in any Yieldstreet Securities.

YieldStreet Inc. is the direct owner of Yieldstreet Management, LLC, which is an SEC-registered investment adviser that manages the Yieldstreet funds and provides investment advice to the Yieldstreet funds, and in certain cases, to retail investors. RealCadre LLC is also indirectly owned by Yieldstreet Inc. RealCadre LLC is a broker-dealer registered with the Securities and Exchange Commission (“SEC”) and a member of the Financial Industry Regulatory Authority (“FINRA”) and the Securities Investor Protection Corporation (“SIPC”). Information on all FINRA registered broker-dealers can be found on FINRA’s BrokerCheck. Despite its affiliation with Yieldstreet Management, LLC, RealCadre LLC has no role in the investment advisory services received by YieldStreet clients or the management or distribution of the Yieldstreet funds or other securities offered on our through Yieldstreet and its personnel. RealCadre LLC does not solicit, sell, recommend, or place interests in the Yieldstreet funds.

Yieldstreet is not a bank. Certain services are offered through Synapse Financial Technologies, Inc. and its affiliates (collectively, “Synapse”) as well as certain third-party financial services partners. Synapse is not a bank and is not affiliated with Yieldstreet. Bank accounts are established by Evolve Bank & Trust. Brokerage accounts and cash management programs are provided through Synapse Brokerage LLC (“Synapse Brokerage”), an SEC-registered broker-dealer and member of FINRA and SIPC. Additional information about Synapse Brokerage can be found on FINRA’s BrokerCheck. By participating in a Synapse cash management program, you acknowledge receipt of and accept Synapse’s Terms of Service, Privacy Policy, and the applicable disclosures and agreements available in Synapse’s Disclosure Library.

Investment advisory services are only provided to clients of YieldStreet Management, LLC, an investment advisor registered with the Securities and Exchange Commission, pursuant to a written advisory agreement.

Our site uses a third party service to match browser cookies to your mailing address. We then use another company to send special offers through the mail on our behalf. Our company never receives or stores any of this information and our third parties do not provide or sell this information to any other company or service.

Read full disclosure