Reviewed by Aug 27, 2020| Updated on
Accretion is the restrained and stepwise growth of capital assets and earnings for the expansion of a business. It also refers to the company’s internal growth, acquisitions, and mergers. In the world of finance, accretion also refers to the accumulation of earnings that an investor anticipates receiving when he or she buys a bond at a discounted price and holds onto it till it matures. The most common applications of accretion in finance cover cumulative preferred stock or zero-coupon bonds.
Breaking Down Accretion
Accretion, when it comes to corporate finance, refers to the value created by means of organic growth, or once a financial transaction has been completed. This may be on the back newer assets being bought at a discounted price or at a price which is well below the CMV (current market value). It may involve acquiring assets that are expected to grow in value on the back of the occurrence of the transaction.
When it comes to the securities market, buying of bonds at a price below the face or par value is perceived as buying at a discount, while purchasing at a price over the face value is considered as buying at a premium. In the world of finance, accretion balances the cost basis from the amount of purchase (discount) to the redemption amount expected at the time of maturity. For instance, if a bond is bought at an amount which is 80% of the face value, then the accretion is 20% in this case.
As the rate of interest rises, the worth of current bonds fall. This means that the bonds being traded in the markets decline in their worth to indicate that there is a rise in the interest rate. As all bonds mature at their face value, the investors will realise a profit on the bonds they have purchased at a discounted price, and that gain is realised through accretion.