Increasing (accretion)

Accretion is a finance term that refers to the increment in the value of a bond after purchasing it at a discount and holding it until the maturity date. A bond is said to be purchased at a discount price when the purchase price falls below its par value. As the redemption date approaches, the value of the bond will grow until it converges with its par or face value at maturity. The acceleration in the value of the bond over time is known as the accretion discount [Corporate Finance Institute]. In corporate finance, accretion is value creation through organic growth or a transaction. For example, new assets are acquired at a discount or for a cost below their perceived current market value (CMV). Accretion can also occur by acquiring assets that grow in value after the transaction. In securities markets, purchasing bonds below their face or par value is considered buying at a discount, whereas purchasing above the face value is known as buying at a premium. In finance, accretion adjusts the cost basis from the purchase amount (discount) to the anticipated redemption amount at maturity. For example, if a bond is purchased for 80% of the face amount, the accretion is 20%. As interest rates increase, the value of existing bonds declines, which means that bonds trading in the market decline in price to reflect the interest rate increase. Since all bonds mature at the face amount, the investor recognizes additional income on a bond purchased at a discount, and that income is recognized using accretion [Investopedia].

Sources:

Hayes, A. (2020). Accretion: Definition in finance and accounting. Investopedia. Retrieved from: https://www.investopedia.com/terms/a/accretion.asp

CFI Team. (2022). Accretion. Corporate Finance Institute. Retrieved from: https://corporatefinanceinstitute.com/resources/fixed-income/accretion/