ACCRETION OF DISCOUNT
Back to GlossaryDefinition
The systematic recognition of the difference between a bond’s purchase price below par and its value as it approaches maturity.
Summary
Accretion of discount is an accounting method used when a bond is purchased for less than its face value (at a discount). Over time, as the bond approaches its maturity date, the discount gradually decreases and the bond's book value increases toward its par value. This systematic increase in value is recorded as interest income, spreading the discount recognition over the bond's remaining life rather than recognizing it all at maturity.
Usage Context
This term is crucial when studying bond accounting, investment analysis, and financial statement preparation. Students need to understand this concept when learning about long-term investments, interest income recognition, and the time value of money.
Common Confusions
- Confusing accretion of discount with amortization of premium (which is the opposite scenario)
- Thinking that accretion creates actual cash flow when it's only a book entry
- Believing the bond's market value automatically increases with accretion
- Mixing up the effective interest method with the straight-line method calculations
