Harness Money

What is accretion of discount?

Accretion of discount refers to the gradual increase in the value of a bond or debt instrument that was issued at a discount relative to its face value (par value). When a bond is issued at a discount, it means it was sold for less than its par value. Over time, until the bond matures, the discount is accreted or amortized, and the bond’s value increases incrementally.

The process of accretion of discount involves recognizing the discount as income or interest expense over the life of the bond. Each accounting period, a portion of the discount is added to the carrying value of the bond, which moves closer to its face value. This accretion is typically done using an effective interest method, where the bond’s carrying value is adjusted based on the market interest rate and time remaining until maturity.

Accretion of discount can be seen as a way to spread the recognition of the discount as interest income or expense over the life of the bond, ensuring that the bond reaches its par value at maturity. This gradual increase in value is accounted for in the bond’s amortized cost and can affect both the income statement and the balance sheet.

It’s important to note that accretion of discount is the accounting treatment for bonds issued at a discount and does not represent actual cash flows. The bondholder does not receive the accreted amount as cash during the bond’s life but instead benefits from a higher redemption amount at maturity.