Definition
Accretion of discount is an accounting term that refers to the gradual increase in the value of a discounted bond or other debt instrument over time. This increase in value is due to the fact that the bond’s face value is greater than the discounted price at which it was purchased.
Importance
Accretion of discount is important because it allows investors to purchase bonds at a discounted price and then receive the full face value of the bond when it matures. This allows investors to earn a higher return on their investment than if they had purchased the bond at its face value.
Example
For example, if an investor purchases a bond with a face value of $1,000 for $900, the investor will receive the full face value of the bond when it matures. The $100 difference between the purchase price and the face value is known as the accretion of discount.
Table
Purchase Price Face Value Accretion of Discount
$900 $1,000 $100
Key Takeaways
- Accretion of discount is an accounting term that refers to the gradual increase in the value of a discounted bond or other debt instrument over time.
- Accretion of discount is important because it allows investors to purchase bonds at a discounted price and then receive the full face value of the bond when it matures.
- The difference between the purchase price and the face value is known as the accretion of discount.
Conclusion
Accretion of discount is an important concept for investors to understand as it allows them to purchase bonds at a discounted price and then receive the full face value of the bond when it matures. By understanding this concept, investors can maximize their returns on their investments.
