Accretive

Loading the player...

What is 'Accretive'

Accretive is the process of accretion, which is growth or increase by gradual addition, in finance and general nomenclature. An acquisition is considered accretive if it adds to the item's value or corporation’s earnings per share. In corporate finance, accretive acquisitions of assets or businesses add more value than the cost of the acquisition, either immediately or over time.

BREAKING DOWN 'Accretive'

In fixed-income investments, the term refers to the increase in value attributable to interest accrued but not paid; discounted bonds, for example, earn interest through accretion until maturity. Accretion, in general finance, refers to the change in price of a bond or security. This most directly relates to situations where the bond is acquired at a discount when compared to the current face value of the bond, also known as the par. As the bond matures, the value increases based on the interest rate in effect at the time of issuance.

In corporate finance, accretion is the creation of value after a transaction has taken place. This can be due to new assets being acquired at a discount or below their perceived current market value. It can also include the acquisition of assets anticipated to grow in value due to the transaction occurring.

Determining the Rate of Accretion

The rate of accretion is determined by dividing the discount by the number of years in the term. In the case of zero coupon bonds, the interest acquired is not compounding. While the value of the bond increases based on the agreed-upon interest rate, it must be held for the agreed-upon term before it can be cashed out.

Examples of Accretion

If a person purchases a bond with a value of $1,000 for the discounted price of $750 with the understanding it will be held for 10 years, the deal is considered accretive. The bond pays out the initial investment plus interest. Depending on the type of bond purchase, interest may be paid out at regular intervals, such as annually, or in a lump sum upon maturity.

If the bond purchase is a zero coupon bond, there is no interest accrual. Instead, it is purchased at a discount, such as the initial $750 investment for a bond with a face value of $1,000. The bond pays the original face value, also known as the accreted value, of $1,000 in a lump sum upon maturity.

A primary example within corporate finance is present during the acquisition of one company by another. First, assume the earnings per share of Corporation X is listed as $100 and earnings per share of Corporation Y is listed as $50. When Corporation X acquires Corporation Y, Corporations X’s earnings per share increase to $150. This deal is 50% accretive due to the increase in value.

RELATED TERMS
  1. Accreted Value

    The value, at any given time, of a multi-year instrument that ...
  2. Accretion of Discount

    The increase in the value of a discounted instrument as time ...
  3. Discount Bond

    A bond that is issued for less than its par (or face) value, ...
  4. Accreting Principal Swap

    A derivative where counterparties exchange financial instrument ...
  5. Bond Discount

    The amount by which the market price of a bond is lower than ...
  6. Accrued Market Discount

    The gain in the value of a discount bond expected from holding ...
Related Articles
  1. Markets

    What Does Accretive Mean?

    In the business world, accretive most often to refers to additional growth from outside sources.
  2. Markets

    Simple Math for Fixed-Coupon Corporate Bonds

    A guide to help to understand the simple math behind fixed-coupon corporate bonds.
  3. Retirement

    Analyzing The Best Retirement Plans And Investment Options: Bonds

    What they are: Debt securities in which you lend money to an issuer (such as a corporation or government) in exchange for interest payments and the future repayment of the bond’s face value. ...
  4. Managing Wealth

    Understanding Bond Prices and Yields

    Understanding this relationship can help an investor in any market.
  5. Markets

    How To Invest In Corporate Bonds

    Understand the basics of corporate bonds to increase your chances of positive returns.
  6. Managing Wealth

    The Basics Of Bonds

    Bonds play an important part in your portfolio as you age; learning about them makes good financial sense.
  7. Personal Finance

    How To Choose The Right Bond For You

    Bond investing is a stable and low-risk way to diversify a portfolio. However, knowing which types of bonds are right for you is not always easy.
  8. Markets

    Bond Basics: Characteristics

    Bonds have a number of characteristics of which you need to be aware. All of these factors play a role in determining the value of a bond and the extent to which it fits in your portfolio. Face ...
  9. Managing Wealth

    5 Reasons to Invest in Municipal Bonds When the Fed Hikes Rates

    Discover five reasons why investing in municipal bonds after the Fed hikes interest rates, and not before, can be a great way to boost investment income.
  10. Trading

    An Introduction To Corporate Bond ETFs

    Learn about the pros and cons of these specialized ETFs, and get in on the opportunities they can provide.
RELATED FAQS
  1. How is the term 'accretive' used in fixed income investments?

    Find out how the word ''accretive'' can be used for fixed income investments that are issued at a discount, such as commercial ... Read Answer >>
  2. What is the difference between an accretive transaction and a dilutive transaction?

    Read about the differences between an accretive and dilutive financial transaction, particularly as it pertains to a mergers ... Read Answer >>
  3. What is the difference between an accretive and a dilutive merger?

    Learn how to distinguish between a merger and acquisition (M&A) deal that is accretive and one that is dilutive, and why ... Read Answer >>
  4. An investor bought a new full faith and credit bond issued by the city of Limrock ...

    The correct answer is d. There are two problems in this question. The first is to recognize the fact that this bond is an ... Read Answer >>
  5. What is considered an accretive acquisition?

    Learn about accretion and dilution in mergers and acquisitions. What makes a deal accretive, and how is earnings per share ... Read Answer >>
  6. What determines the price of a bond in the open market?

    Learn more about some of the factors that influence the valuation of bonds on the open market, and why bond prices and yields ... Read Answer >>
Hot Definitions
  1. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  2. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  3. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  4. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  5. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
  6. Enterprise Value (EV)

    A measure of a company's value, often used as an alternative to straightforward market capitalization. Enterprise value is ...
Trading Center