Accretion of discount definition
/What is Accretion of Discount?
Accretion of discount is the ongoing increase in the value of a discounted security as its maturity date approaches. As an example, an investor buys a bond at a discount, where the purchase price is $950 and its face value is $1,000. Because the issuer will pay the full $1,000 face value on the maturity date of the bond, its value will gradually increase between the purchase date and the maturity date. This gradual increase in value is called accretion of discount.
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Accounting for Accretion of Discount
Accretion is recorded through a series of accounting entries over the remaining life of the bond. It may be recorded using the straight-line method, where a standard amount of the discount is added back to the bond value each month. Alternatively, the constant yield method may be used, where the rate of increase in bond value is greatest near the maturity date. The constant yield method is more theoretically accurate than the straight-line method, but is more difficult to calculate.