ACCRETION OF DISCOUNT Meaning and
Definition
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Accretion of discount refers to the gradual increase in the value of a bond or debt instrument over time as it approaches its maturity date. The term is commonly used in accounting and finance, particularly in the context of amortizing debt.
When a bond is issued at a price below its face value, it is said to be sold at a discount. This discount represents the difference between the bond's purchase price and its par value, which is the amount the bond will be redeemed for at maturity. The discount is typically treated as an expense that is recorded on the balance sheet as a liability.
As the bond moves closer to its maturity date, the discount gradually decreases, resulting in an increase in the bond's carrying value. This increase is referred to as the accretion of discount. It is recognized as interest income over the life of the bond and is recorded in the accounting books, reducing the liability associated with the discount.
The accretion of discount is typically calculated using a straight-line method, where the annual amount of discount to be accreted is spread evenly over the life of the bond. This ensures a consistent increase in the carrying value of the debt instrument, leading to a gradual convergence between the purchase price and par value by the time of maturity.
In summary, accretion of discount refers to the process of recognizing the increase in the value of a bond or debt instrument over time as it approaches maturity. This gradual increase is recorded as interest income and reduces the liability associated with the initial discount.
