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

January 25, 20246 min read
What’s the Difference Between Earned, Accrued & Paid Interest?
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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 $10,000 in an investment that earns 10% per year, for example, your earned interest that year will be 10%, or $1,000. You also need to consider compounding. From the example above, you earned 10% or $1,000 during that year. In the second year, you’ll earn interest on $11,000 (your initial investment plus the first year’s earning), which would be $1,100.

Here is another example. If you start with a $10,000 investment earning 5% annually:

  • In the first year, you earn 5% of $10,000, which is $500.
  • Your total at the end of the first year becomes $10,500.
  • For the second year, your investment grows by another 5% of $10,500: that’s $10,500 x 0.05 = $525.
  • At the end of the second year, your total would be $10,500 + $525 = $11,025.

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.

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9 Statistics as of the most recent month end.

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