Compound Accreted Value - CAV

DEFINITION of 'Compound Accreted Value - CAV'

A measure of the theoretical value of a zero-coupon bond at any given point in time. Because there are no interest payments like there are with traditional bonds, the interest of a zero-coupon bond accrues until maturity. Therefore, the CAV can be calculated by adding all of the interest earned up to a given point in time to the original price.

BREAKING DOWN 'Compound Accreted Value - CAV'

Calculating a zero-coupon bond's CAV becomes important if the bond carries a call provision. This is because call provisions for zero-coupon bonds are typically linked to the bond's CAV. The provision will usually stipulate that the issuer can call the bond on a specific date at a price that is a premium to the bond's CAV.

A zero-coupon bond is trading at a premium if it costs more than its CAV at that specific point in time. Conversely, the zero-coupon bond is trading at a discount if it costs less than its CAV.

RELATED TERMS
  1. Zero-Coupon Bond

    A debt security that doesn't pay interest (a coupon) but is traded ...
  2. Zero-Coupon Convertible

    A fixed income instrument that is a combination of a zero-coupon ...
  3. Coupon Stripping

    The separation of a bond's periodic interest payments from its ...
  4. Accreted Value

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

    A bond that is issued for less than its par (or face) value, ...
  6. Deferred Interest Bond

    A debt instrument that pays interest only upon maturity. Unlike ...
Related Articles
  1. Bonds & Fixed Income

    How Are Zero-Coupon Municipal Bonds Taxed?

    What every investor needs to know about taxes and zero-coupon muni bonds.
  2. Options & Futures

    Bonds Gone Wild

    The only real difference between you and Warren Buffett is a few well-chosen stocks – the billion-dollar fortune is the result.
  3. Options & Futures

    20 Investments: Zero-Coupon Securities

    What Is It? A zero-coupon security, or "stripped bond", is basically a regular coupon-paying bond without the coupons. The process of "stripping" or "zeroing" a bond is usually done by a brokerage ...
  4. Professionals

    Corporate Bonds

    FINRA/NASAA Series 65: Section 8 Corporate Bonds. In this section four types of corporate bonds: secured, unsecured, convertible and zero-coupon bonds.
  5. Bonds & Fixed Income

    Explaining Original Issue Discount

    An original issue discount is the amount below par at which a bond or other debt instrument is issued.
  6. Bonds & Fixed Income

    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.
  7. Professionals

    Forward Contracts on Bonds

    CFA Level 1 - Forward Contracts on Bonds. Learn the features of forward contracts on bonds. See how a bonds maturity, embedded options and default risk affect the forwards contract.
  8. Bonds & Fixed Income

    A Guide to High Yield Corporate Bonds

    The universe of corporate high yield bonds encompasses multiple different types and structures.
  9. Professionals

    Special Munis

    FINRA Series 7 Online Study Guide
  10. Investing

    Advising FAs: Explaining Bonds to a Client

    Most of us have borrowed money at some point in our lives, and just as people need money, so do companies and governments. Companies need funds to expand into new markets, while governments need ...
RELATED FAQS
  1. How does an investor make money on a zero coupon bond?

    Learn about investing in zero-coupon bonds, exactly how they work as an investment vehicle, and their advantages and disadvantages ... Read Answer >>
  2. What is the difference between a zero-coupon bond and a regular bond?

    The difference between a zero-coupon bond and a regular bond is that a zero-coupon bond does not pay coupons, or interest ... Read Answer >>
  3. How do I calculate the holding period return yield on a zero-coupon bond?

    Learn how to calculate the holding period return yield for a zero-coupon bond based on a formula with a relevant example ... Read Answer >>
  4. Why do interest rates tend to have an inverse relationship with bond prices?

    At first glance, the inverse relationship between interest rates and bond prices seems somewhat illogical, but upon closer ... Read Answer >>
  5. What is the formula for calculating the capital to risk weight assets ratio for a ...

    Learn about the Macaulay duration and zero-coupon bonds, the formula used for the calculation and how to calculate the Macaulay ... Read Answer >>
  6. What are the different types of college savings accounts?

    Find out more about the Macaulay duration and zero-coupon bonds and how to calculate the Macaulay duration of a zero-coupon ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center