Accretion refers to the capital gains or the increase in the value that a bondholder receives when holding a bond purchased at a discount until its maturity. This typically occurs with bonds that are issued at a price lower than their face value, resulting in a discount for the bondholder. Over time, as the bond approaches its maturity date, its value gradually increases, converging with its face value. The accretion represents the gradual appreciation of the bond’s value to match its face value by the time it matures.
One common example of accretion occurs with zero-coupon bonds, which are bonds that do not pay periodic interest but are issued at a discount to their face value. Bondholders of zero-coupon bonds receive their returns primarily through the accretion of the bond’s value over time, leading to a gain upon maturity when the bond reaches its face value.
Accretion is an important concept for bond investors as it can impact the overall return on investment for bonds purchased at a discount. It reflects the process by which the bond’s value aligns with its face value as it approaches maturity, resulting in a gain for the bondholder.