Accretion (of a Discount) Definition
Accretion, in a financial context, specifically relates to the gradual growth in the value of an investment, typically a bond, purchased at a discount. Over the duration of the time until the bond’s maturity date, its value increases approaching its face or par value incrementally. This is the essence of the term ‘Accretion of a Discount’.
Accretion (of a Discount) Key Points
- Accretion refers to the gradual increase in the value of an investment purchased at a discount.
- It typically applies to bond instruments, specifically those purchased below par value.
- Accretion continues until the bond reaches its face or par value by its maturity date.
What is the Accretion (of a Discount)?
When an investor purchases a bond below its par or face value, they earn profits more than just the current ticker price. As the bond gets closer to its maturity date, its value climbs towards its actual par value. This is the concept behind the term ‘Accretion of a Discount.’
Why the Accretion (of a Discount) is significant?
The significance of accretion lies in its capacity to enhance investors’ returns over time. For a bond purchased at a discounted value, the return-on-investment isn’t limited to the price difference between the buying price and the face value. The gradual increase in the bond’s value towards its par value, attributed to accretion, also adds up to the total profit, thus increasing return on investment.
When does Accretion (of a Discount) occur?
Accretion of a discount occurs from the moment the bond is purchased until its maturity. The process is gradual, and the value of the bond purchased at a discount increases constantly over this period until it achieves its original face value.
Where does Accretion (of a Discount) apply?
Accretion primarily applies in the financial field, specifically bond investment. Any bond purchased below its face value is subject to accretion. This concept is a critical aspect of financial markets, particularly fixed-income securities markets, where bonds are dominant instruments.
How does Accretion (of a Discount) work?
In the simplest terms, the process of accretion involves a continuous upward adjustment of the book value of a bond purchased at a discount. A set schedule is followed throughout the bond’s life until it reaches its par value. An investor records this increase as an interest income. Consequently, the accreted value contributes significantly to the holder’s returns.
