How to Calculate Accretion on a Zero Coupon Bond
Zero coupon bonds are a type of debt obligation that does not pay interest. Instead, they are sold at a discount to their face value and appreciate over time. Accretion is the process by which the bond’s value increases towards its face value. Calculating accretion is crucial for investors to understand the potential return on their investment.
- Enter the face value of the bond.
- Enter the current price of the bond.
- Enter the maturity date of the bond.
- Click ‘Calculate’ to see the accretion and a visual representation.
The formula to calculate accretion is: Accretion = Face Value – Current Price. The accretion can also be visualized using a line chart showing the accretion over time.
| Bond | Face Value | Current Price | Accretion |
|---|---|---|---|
| Bond A | $1000 | $600 | $400 |
| Bond B | $500 | $300 | $200 |
- Accretion is taxed as ordinary income, so consider the tax implications when investing in zero coupon bonds.
- Zero coupon bonds are typically more sensitive to interest rate changes compared to other bonds.
What is the difference between accretion and amortization?
Accretion is the increase in the value of a bond over time, while amortization is the process of allocating the cost of an intangible asset over its useful life.
For more information, see the U.S. Department of the Treasury and the Investopedia.