DEFINITION of 'Accretion of Discount'

The increase in the value of a discounted instrument as time passes and it approaches maturity. The value of the instrument will accrete (grow) at the interest rate implied by the discounted issuance price, the value at maturity and the term to maturity.

BREAKING DOWN 'Accretion of Discount'

For example, a three-month note maturing at $100 is issued at $98. Between issuance and maturity, the value of the bond will increase until it reaches its full value of $100, which is the amount that will be paid at maturity.

Accretion can be accounted for in a straight-line method, whereby the increase is evenly spread throughout the term, or by constant interest, whereby the increase is heaviest closest to maturity.

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