Ratable Accrual Method

Definition of 'Ratable Accrual Method'


A method for determining when and how much income was earned over a period of time. The ratable accrual method can be used to compute the interest income for tax purposes. This is opposed to the payment method, and could be used to find the accrued market discount of a discount bond traded in the secondary bond market. It can also be used to determine property tax on real estate held over several tax periods.

Investopedia explains 'Ratable Accrual Method'


The ratable accrual method usually results in a greater accrual of discount than the other method for determining accrued market discount, which is the constant yield method. However, it also uses a simpler calculation: market discount is divided by the number of days from the bond's maturity date minus the purchase date, multiplied by the number of days the investor actually held the bond.

For example if you bought a $20,000 bond for $18,000 with 400 days until expiry, then you sold that bond 300 days later for $19,500. To compute interest income you would multiply the portion of the days held by the increase in value. 300/400 = 0.75. $19,500-$18,000 = $1,500. 0.75 x $1,500 = $1,125 interest income for tax purposes.


Filed Under:

comments powered by Disqus
Hot Definitions
  1. Aggregate Risk

    The exposure of a bank, financial institution, or any type of major investor to foreign exchange contracts - both spot and forward - from a single counterparty or client. Aggregate risk in forex may also be defined as the total exposure of an entity to changes or fluctuations in currency rates.
  2. Organic Growth

    The growth rate that a company can achieve by increasing output and enhancing sales. This excludes any profits or growth acquired from takeovers, acquisitions or mergers. Takeovers, acquisitions and mergers do not bring about profits generated within the company, and are therefore not considered organic.
  3. Family Limited Partnership - FLP

    A type of partnership designed to centralize family business or investment accounts. FLPs pool together a family's assets into one single family-owned business partnership that family members own shares of. FLPs are frequently used as an estate tax minimization strategy, as shares in the FLP can be transferred between generations, at lower taxation rates than would be applied to the partnership's holdings.
  4. Yield Burning

    The illegal practice of underwriters marking up the prices on bonds for the purpose of reducing the yield on the bond. This practice, referred to as "burning the yield," is done after the bond is placed in escrow for an investor who is awaiting repayment.
  5. Marginal Analysis

    An examination of the additional benefits of an activity compared to the additional costs of that activity. Companies use marginal analysis as a decision-making tool to help them maximize their profits. Individuals unconsciously use marginal analysis to make a host of everyday decisions. Marginal analysis is also widely used in microeconomics when analyzing how a complex system is affected by marginal manipulation of its comprising variables.
  6. Treasury Inflation Protected Securities - TIPS

    A treasury security that is indexed to inflation in order to protect investors from the negative effects of inflation. TIPS are considered an extremely low-risk investment since they are backed by the U.S. government and since their par value rises with inflation, as measured by the Consumer Price Index, while their interest rate remains fixed.
Trading Center