Investors normally make decisions about which bonds to invest in based on their YTMs. Because the YTM is a complex calculation which involves trail and error, it’s usually accomplished with the help of a programmable business calculator.

Bonds pay interest in arrears; in other words, they pay interest only after it’s earned. If our $1,000 bond pays interest in March and September, the March interest payment would compensate the investor for lending the issuer money from the previous September until March. The September interest payment compensates the investor for the loan of the money from the previous March until September.

Even though bonds pay interest only in arrears, the investors who own bonds earn interest for each day that they own them. When bonds are traded, the seller of the bond is entitled to receive any interest which has been earned but hasn’t yet been received. Going back to our bond which pays in March and September, if the owner sold this bond in June, he or she would be entitled to receive the interest earned from March (when the last interest payment was made) until the day that the bond was sold. This interest -- which has been earned to date but not yet received -- is known as accrued interest.