Accumulation Bond

DEFINITION of 'Accumulation Bond'

A bond issued at an original issue discount (OID). This means that the interest accumulates but is not paid until maturity; there are no semi-annual coupon payments as with most bonds.

These bonds are also referred to as "accrual bonds."

BREAKING DOWN 'Accumulation Bond'

As accumulation bonds are always sold at an OID, they are always sold below face value, and the IRS considers the OID a form of interest. Even though the bondholder is not receiving coupon payments, the interest on the bond is still accumulating and must be reported as interest income on the bondholder's tax return each year.

Some investors like to use accumulation bonds in their financial plans, as they know the exact amount they will receive at a future point in time when the bond matures, even though they don't receive interim cash flows.

RELATED TERMS
  1. Original Issue Discount - OID

    The discount from par value at the time that a bond or other ...
  2. Bond

    A debt investment in which an investor loans money to an entity ...
  3. Discount Bond

    A bond that is issued for less than its par (or face) value, ...
  4. Zero-Coupon Bond

    A debt security that doesn't pay interest (a coupon) but is traded ...
  5. Coupon Bond

    A debt obligation with coupons attached that represent semiannual ...
  6. Bond Discount

    The amount by which the market price of a bond is lower than ...
Related Articles
  1. 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.
  2. Markets

    Using Excel PV Function to compute Bonds PV

    To determine the value of a bond today - for a fixed principal (par value) to be repaid in the future at any predetermined time - we can use an Excel spreadsheet.
  3. Markets

    Comparing Yield To Maturity And The Coupon Rate

    Investors base investing decisions and strategies on yield to maturity more so than coupon rates.
  4. Investing

    What is a Premium Bond?

    A premium bond is one that trades above its face or nominal amount.
  5. Managing Wealth

    How To Evaluate Bond Performance

    Learn about how investors should evaluate bond performance. See how the maturity of a bond can impact its exposure to interest rate risk.
  6. 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.
  7. Markets

    Simple Math for Fixed-Coupon Corporate Bonds

    A guide to help to understand the simple math behind fixed-coupon corporate bonds.
  8. Managing Wealth

    Risks To Consider Before Investing In Bonds

    Make sure you understand the risks associated with bonds before making an investment decision.
  9. Trading

    Top 6 Uses For Bonds

    We break down the stodgy stereotype to see what these investments can do for you.
  10. Markets

    How Does A Bond’s Coupon Interest Rate Affect Its Price?

    All bonds come with a coupon interest rate, which is the fixed annual interest a bond pays.
RELATED FAQS
  1. What are the key factors that will cause a bond to trade as a premium bond?

    Learn about the primary factor that can cause bonds to trade at a premium, including how national interest rates affect bond ... Read Answer >>
  2. Why is my bond worth less than face value?

    Find out how bonds can be issued or traded for less than their listed face values, and learn what causes bond prices to fluctuate ... Read Answer >>
  3. If I buy a $1,000 bond with a coupon of 10% and a maturity in 10 years, will I receive ...

    Simply put: yes, you will. The beauty of a fixed-income security is that the investor can expect to receive a certain amount ... Read Answer >>
  4. What constitutes an "intention to call a debt instrument before maturity" for tax ...

    When a bond is sold for a capital gain, the seller will face taxation on the profit. The profit from the sale will either ... Read Answer >>
  5. Do long-term bonds have a greater interest rate risk than short-term bonds?

    The answer to this question lies in the fixed income nature of bonds and debentures, often referred to together simply as ... Read Answer >>
  6. Can the marginal propensity to consume ever be negative?

    Find out when a bond's yield to maturity is equal to its coupon rate, and learn about the basic components of bonds and how ... Read Answer >>
Hot Definitions
  1. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  2. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  3. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  4. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  5. 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 ...
  6. Brexit

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