What Is Accretion (of a Discount)?
Accretion of a discount is the process by which an investor adds to their investment portfolio through the purchase of discounted debt instruments. This type of investing involves buying bonds or other securities at a price that is lower than face value, and then holding them until they reach maturity when they can be sold for full face value. The difference between what was paid for the security and its eventual sale price represents the accreted gain on the investment.
The primary benefit of this type of investing strategy is that it allows investors to earn higher returns with less risk than traditional investments such as stocks or mutual funds. Accretion also provides investors with greater liquidity since these types of investments are typically held until maturity rather than being actively traded in markets like stocks and bonds. Additionally, because discounts are often available from distressed companies, there may be additional upside potential if those companies recover over time.
How to Calculate Accretion of a Discount?
Accretion of a discount is the process of calculating the amount by which an asset’s value increases over time due to interest or other factors. This calculation can be used for financial instruments such as bonds, notes, and mortgages. To calculate accretion of a discount, you will need to know the face value (or par value) of the instrument, its current market price, and its coupon rate.
First, subtract the current market price from the face value to determine how much has been discounted on the instrument. Then divide this number by either two or four depending on whether it is a semi-annual or annual payment bond respectively. Finally multiply this result by both the coupon rate and number of years until maturity in order to get your final answer for accretion of discount. For example if you have a $1000 bond with 5% coupon rate that matures in 10 years then your equation would look like: ($1000 – Current Market Price)/2 * 0.05 * 10 = Accretion Of Discount Amount