Definition: The annual amount of money earned by the owner of a bond because he bought it for less than its original (ie, face) value but will receive the face value when the bond’s term is over (ie: the maturity date arrives).
Example: DET Corporation offered a bond four years ago that had a face value of $1,000. Audrey bought one back then, essentially lending the company $1,000. The bond matures in one year, at which time DET must take it back and pay the owner $1,000 for it. Something comes up and Audrey realizes she needs to sell the bond now. Jason buys it from her for $990. Forgetting for a moment the interest Jason is entitled to receive during the year now that he’s the bond’s owner, he earns $10 because he’ll receive $1,000 at the end of year for something he paid $990 for. The increase in the value of the bond toward $1,000 as it approaches the maturity date represents accretion.
Investeach explains: The federal government’s tax collection department, the Internal Revenue Service (IRS), considers accretion to be the same as interest a person earns when owning a bond. It is not considered to be appreciation of an investment that could qualify for the lower capital gains tax rate.
See discount bond for reasons why a bond’s market value may fall below its face value.
Riddle me this:
1. Relative to its face value, at what price would an investor buy a bond in order to experience accretion?
2. Besides accretion, in what other way can a bondholder earn money?
3. What’s in it for the IRS to treat accretion the same way as interest the investor receives?
Opposite of: Amortization.