Accrued Market Discount

DEFINITION of 'Accrued Market Discount'

The gain in the value of a discount bond expected from holding it for any duration until its maturity. Because discount bonds are sold below face value, it is expected that they will gradually rise in market price until reaching maturity. The difference between the discounted price for which the bond is sold and its face value at maturity represents the return on investment to the bondholder and may be taxable at the federal, state and/or local level.

BREAKING DOWN 'Accrued Market Discount'

Suppose an investor purchases a discount bond with a par value of $1,000 for $700. By holding the bond, the investor can expect a maximum gain of $300. Any appreciation above the $700 paid is called the accrued market discount. This rise in price is different than that which occurs in regular coupon bonds as a result of lowering interest rates.

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