DEFINITION of '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.

BREAKING DOWN 'Accreted Value'

Accreted value may not have any relationship to 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 year two. If current market interest rates fall, the fair market value of that bond will be higher than its accreted value; if rates rise, the value of the bond will be less than its accreted value.

Why Accreted Value is Relevant to Bond Pricing

The accreted value is regarded as a theoretical pricing on a bond if it were to be sold and the market interest rates remained consistent at their most recent level. Accreted value is also a factor in determining the weighted average mature for capital appreciation bonds. A variety of elements may considered when assessing an 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 some gradual daily gains over the duration of the bond. The interest that a zero coupon bond accumulates is typically reinvested automatically back into. 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 liner mathematical projections based on the price when issue 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 credit worthiness.

RELATED TERMS
  1. Accretion

    1. Asset growth through addition or expansion. 2. In reference ...
  2. Accretion of Discount

    Accretion of discount is the increase in the value of a discounted ...
  3. Bond Valuation

    Bond valuation is a technique for determining the theoretical ...
  4. Discount Bond

    A discount bond is a bond that is issued for less than its par ...
  5. Accretive Acquisition

    An acquisition that will increase the acquiring company's earnings ...
  6. Bond Discount

    Bond discount is the amount by which the market price of a bond ...
Related Articles
  1. Investing

    Why Bond Prices Fall When Interest Rates Rise

    Never invest in something you don’t understand. Bonds are no exception.
  2. Investing

    Corporate Bond Basics: Learn to Invest

    Understand the basics of corporate bonds to increase your chances of positive returns.
  3. Investing

    How Interest Rates Impact Bond Values

    The relationship between interest rates and bond prices can seem complicated. Here's how it works.
  4. Investing

    Top 6 Uses For Bonds

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

    Corporate Bonds: Advantages and Disadvantages

    Corporate bonds can provide compelling returns, even in low-yield environments. But they are not without risk.
  6. Investing

    The Basics Of Bonds

    Bonds play an important part in your portfolio as you age; learning about them makes good financial sense.
  7. Investing

    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.
  8. Investing

    Find The Right Bond At The Right Time

    Find out which bonds you should be investing in and when you should be buying them.
RELATED FAQS
  1. What determines bond prices on the open market?

    Learn more about some of the factors that influence the valuation of bonds on the open market and why bond prices and yields ... Read Answer >>
  2. What is the difference between an accretive and a dilutive merger?

    Learn how to distinguish between a merger and acquisition (M&A) deal that is accretive and one that is dilutive, and why ... Read Answer >>
  3. How a bond's face value differs from its price

    Discover how bonds are traded as investment securities and understand the various terms used in bond trading, including par ... Read Answer >>
  4. How does an investor make money on bonds?

    Bonds are part of fixed-income securities called debt obligations, meaning one party borrows from another party who expects ... Read Answer >>
  5. When is a bond's coupon rate and yield to maturity the same?

    Find out when a bond's yield to maturity is equal to its coupon rate, and learn about the components of bonds and how they ... Read Answer >>
Hot Definitions
  1. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  2. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  3. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
  4. Inventory Turnover

    Inventory turnover is a ratio showing how many times a company has sold and replaces inventory over a period.
  5. Watchlist

    A watchlist is list of securities being monitored for potential trading or investing opportunities.
  6. Hedge Fund

    A hedge fund is an aggressively managed portfolio of investments that uses leveraged, long, short and derivative positions.
Trading Center