What Is Accreted Value?

Accreted value is a bond's current value, often calculated for澳洲幸运5官方开奖结果体彩网: balance sheet purposes, including the interest acc🏅rued even though that is usually not paid until the bond matures.

Understanding Accreted Value

Accreted value is the value, at any given time, of a multi-year instrument that accrues interest but does not pay that interest until maturity. The most well-known applications include 澳洲幸运5官方开奖结果体彩网:zero-coupon bonds or 澳洲幸运5官方开奖结果体彩网:cumulative preferred stock.

Accreted value of a bond may not have any relationship to its market value. For example, a 10-year, 10-percent zero-coupon bond with a final maturity of $100 will have an accreted value of perhaps $43.60 in the second year. If current market interest rates fall, the 澳洲幸运5官方开奖结果体彩网:fair market value of t🌊hat bond will be higher than its accreted value and if rates rise, the value of the 🍬bond will be less than its accreted value.

Accreted value can be conceptualized as the theoretical price of a bond if it were to be sold at a given time (and the market interest rates remained at their most recent le🎀vel until maturity). Accreted value is also a factor in dete🀅rmining the weighted average for capital appreciation bonds.

Accreted Value and Bond Pricing

A variety of elements may be considered when assessing accreted value. It relates to the price of the initial offering for the bonds and related elements. This includes t✤he initial buyer’s investment when the initial offering was made, along with the latest accrued interest based on that acquisition at the initial offering.

The bond’s value should escalate following a linear trajectory that sees incremental daily gains over the duration of the bond. The interest that a zero-coupon bond accumulates is considered to be reinvested back automatically. There is a mathematicaꦆl value that can be assigned to the bond on any given day, which would be its accreted value. This might also be represented as i🍰ts accumulated value.

There may be variances between the market value of a bond compared with the accreted value. This is due to the mathematical projections based on the price wh꧅en issuedꦍ relative to the price at redemption.

For instance, if a zero-coupon bond was purchased at $90, after 1,000 days it might be redeemed for $100. As time passed with the bond maturing, its value would accrete at a rate of one cent daily. Halfway through that period, the accreted value of the bond would be $95. That price might have no c🌠orrelation to the market value of the bond at that time due to the fluctuations of demand and supply. The availability of the bond can also be affected by the issuer’s creditworthiness.

Accounting for Bond Accretion

When accounting for bond accretion, there are two main methods: th✱e straight-line method and the constant yield method.

Straight-Line Method

The increase in the value of the bond is spread evenly throughout the bond's term in this method. For example, if the term of the bond is 10 years and the company reports its financials every quarter, it means that there are 40 financial periods up to maturity.

A discount of $500 would be divided across the 40 periods, which equals $12.50 per quarter. There will be an accretion of $12.50 in 𒁏each period until maturity, and this method will raise the bond liabili𒉰ty balance by $12.50 in each period until the redemption date.

Constant Yield Method

The increase in the value of the bond is the heaviest closest to the maturity date with the constant yield method. The difference between the constant yield method andꦗ the straight-line method is that the increment is not even with the constant yield method; some periods will show bigger gains than other periods, and t🧸he gains are concentrated in the last phase of the bond’s life.

When accounting for bond accretion with the constant yield method, the first step is determining yield to maturity (YTM). The YTM is what the bond will earn until its maturity date. This calculation requires three inputs: the par value of the bond, price, years to maturity, and the bond i𒅌n༒terest rate.

Accreted Value FAQs

What Is Accretion of Discount?

Accretion of discount refers to the increase in value of a discounted instrument, such as a bond, as the maturity😼 date comes closer with the pass💙age of time. The value of the bond increases at the interest rate that is implied by the discounted issuance price, the value at the time of maturity, and the maturity term.

What Is Compound Accreted Value?

Compound accreted va♉lue (CAV) refers to the measure of the value of a zero-coupon bond. It is used to calculate the value of zero-cꦐoupon bonds prior to their maturity date.

How Do You Record Discounts on Bonds Payable?

Discounts on ꦬbonds payable are always recorded on the balance sheet with the account bonds payable. As lon🌟g as the bond is a long-term liability, both bonds payable and discount on bonds payable are reported on the balance sheet as long-term liabilities.

What Is Accreted Interest?

As it pertains to bonds—s💦pecifically capital appreciation bonds and convertible capital appreciation bonds—prior to the conversion dates, accreted interest refers to the accreted value minus the denominational amount (as of the date of calculation).

A more general definiti🍸on of accreted interest is interest accru🙈ed on a loan asset that is added to the principal rather than being paid as interest while it accrues.