What Is Accreted Value?
- Accreted value is a bonds current value, often calculated for balance sheet purposes, including the interest accrued even though that is usually not paid until the bond matures.
- Concept of accreted value can be seen in zero-coupon bonds or cumulative preferred stock.
- Accreted value of a bond may not have any relationship to its market value.
Understanding Accreted Value
Accreted value is the value, at any given time, of a multi-year instrument that accrues interest but does not pay that interest until maturity. The most well-known applications include zero-coupon bonds or cumulative preferred stock.
Accreted value of a bond may not have any relationship to it's market value. For example, a 10-year, 10-percent zero-coupon bond with a final maturity of $100 will have an accreted value of perhaps $43.60 in the second year. If current market interest rates fall, the fair market value of that bond will be higher than its accreted value and if rates rise, the value of the bond will be less than its accreted value.
Accreted value is regarded as a theoretical pricing on a bond if it were to be sold and the market interest rates remained at their most recent level until maturity. Accreted value is also a factor in determining the weighted average for capital appreciation bonds.
Accreted Value and Bond Pricing
A variety of elements may be considered when assessing accreted value. It relates to the price of the initial offering for the bonds and related elements. This includes the initial buyer’s investment when the initial offering was made, along with the latest accrued interest based on that acquisition at the initial offering.
The bond’s value should escalate following a linear trajectory that sees incremental daily gains over the duration of the bond. The interest that a zero coupon bond accumulates is considered to be reinvested back automatically. There is a mathematical value that can be assigned to the bond at any given day, which would be its accreted value. This might also be represented as its accumulated value.
\There may be variances between the market value of a bond compared with the accreted value. This is due to the mathematical projections based on the price when issued relative to the price at redemption.
For instance, if a zero coupon bond was purchased at $90, after 1,000 days it might be redeemed for $100. As time passed with the bond maturing, its value would accrete at a rate of one cent daily. Halfway through that period, the accreted value of the bond would be $95. That price might have no correlation to the market value of the bond at that time due to the fluctuations of demand and supply. The availability of the bond can also be affected by the issuer’s creditworthiness.