What is Accrual Bond?

An accrual bond defers periodic interest payments usually until maturity, much like a zero coupon bond, except the 澳洲幸运5官方开奖结果体彩网:coupon rate is fixed to the 澳洲幸运5官方开奖结果体彩网:principal value.

Understanding Accrual Bond

An accrual bond's interest is added to the principal balance of the bond and is either paid at maturity or, at some later date, when the bond begins to pay both principal and interest based on the accrued principal and interest to that point.

A traditional bond involves making periodic interest payments to bondholders in the form of coupons. The interest is paid at scheduled dates until the bond expires, at which point, the principal investment is repaid to the bo♈ndholders. However, not all bonds make scheduled coupon payments. One such bond is the accrual bond.

An accrual bond defers interest, usually until the bond matures. This means interest is added to the principal and subsequent interest calculations are on the growing principal. In other words, the interest due on the accrual bond in each period accretes an🥃d is added to the existing principal balance of the bo🌺nd due for payment at a later date.

An accrual bond is typically issued with a long-term maturity (20 to 25 years) by corporate entities and is sold at a 澳洲幸运5官方开奖结果体彩网:deep discount, which represents the interest earned on the bond, to it's 澳洲幸运5官方开奖结果体彩网:face value. Although interest is not paid throughout the bond’s life, the 澳洲幸运5官方开奖结果体彩网:Internal Revenue Service (IRS) still requires holders of accrual bonds to report the 澳洲幸运5官方开奖结果体彩网:imputed interest on the bond as interest income for tax purposes.

The interest does not necessarily have to be paid at maturity. It could also be paid at some point after the interest has accrued up to a certain level. When the bond begins to pay both principal and interest based on the accrued principal and interest at that point, this is known as a 澳洲幸运5官方开奖结果体彩网:Z tranche and is common in 澳洲幸运5官方开奖结果体彩网:collateralized mortgage ob🐲ligations (CMOs).

In a CMO that includes a Z tranche, the interest payments that otherwise would be paid to the Z-tranche holder are used to pay down the principal of another tranche. After that tranche is paid off, the Z tranche begins to pay down based on the original principal of the tranche plus the 澳洲幸运5官方开奖结果体彩网:accrued interest.

In contrast to a 澳洲幸运5官方开奖结果体彩网:zero-coupon bond, an accrual bond has a clearly stated coupon rate. Similar to a zero-coupon bond, an accrual bond, or Z tranche, has limited to no 澳洲幸运5官方开奖结果体彩网:reinvestment risk. This is because the interest payment made to bondholders is delayed. However, accrual bonds, by definition, have a longer duration than bonds with the same maturity that make regular interest or principal and interest payments. As such, accrual bonds are subject to greater 澳洲幸运5官方开奖结果体彩网:interest rate risk than bonds th♊at make periodic 🔯payments over their entire terms.