What Is Accretion?
Let me explain accretion directly to you: in finance, it's the buildup of extra income you expect as an investor after buying a bond at a discount and holding it to maturity. You'll see this most often with zero-coupon bonds or cumulative preferred stock.
Accretion also means the steady growth in a company's assets and earnings from expanding the business, internal development, or through mergers and acquisitions.
Key Takeaways
Accretion is about the slow, step-by-step growth of assets. In finance, it's the extra income from buying a bond cheap and waiting until it matures. You calculate the accretion rate by dividing the bond's discount by the years to maturity.
Understanding Accretion
In corporate finance, I see accretion as creating value through natural growth or deals, like buying assets below their current market value or ones set to rise after the purchase.
In the securities world, buying bonds below par is a discount, above is a premium. Accretion here adjusts your cost from the discount price to the full redemption at maturity. For instance, if you buy at 80% of face value, that's 20% accretion.
Factoring in Bond Accounting
When interest rates go up, existing bonds lose value, so their market price drops to match. But since bonds mature at face value, if you buy at a discount, you get extra income recognized through accretion.
Bond Accretion in Finance
The accretion rate comes from dividing the discount by the term years. For zero-coupon bonds, interest doesn't compound; the value grows at the set rate, but you hold it full term to cash out.
Say you buy a $1,000 bond for $860, maturing in 10 years. You recognize $140 extra income over that time. It starts as a discount on your books, then portions move to income each year until maturity.
Earnings Accretion in Accounting
EPS is earnings for common shareholders divided by average shares out. Accretion here means EPS rises due to an acquisition.
Important Note
Remember, a security's accreted value might not match its market value at all.
Examples of Accretion
Take a firm with $2,000,000 earnings and 1,000,000 shares: EPS is $2. It issues 200,000 shares to buy a company adding $600,000 earnings. New EPS is $2,600,000 over 1,200,000 shares, or $2.17—that's accretion from the deal.
Or, buy a $1,000 bond for $750, hold 10 years: it's accretive. Interest might pay yearly or at end. For zero-coupon, no interest—just discount buy, matures at $1,000 accreted value.
In corporate finance, say Corporation X has $100 EPS, Y has $50. X buys Y, combined EPS hits $150—that's 50% accretive.
Fast Fact
Accretion of a discount is the value rise of a discounted instrument as maturity nears. Also, long-term debts like car loans turn short-term when payoff is within a year—after four years on a five-year loan, for example.
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