Glossary of Municipal Securities Terms

ACCRETION OF DISCOUNT

An accounting process by which the book value of a security purchased at a discount from par is increased during the security’s holding period. The accretion reflects the increase in the security’s value as it approaches the redemption or maturity date. The value of the security will grow at the interest rate implied by the discounted issuance price, the value at maturity and the term to maturity. Under a “straight line” accretion method, the amount of yearly accretion is the same for all years and is equal to the product of the total amount of the discount divided by the number of years to redemption. Under a “constant interest” accretion method, the amount of the yearly accretion increases as the redemption date approaches and for any semi-annual period is equal to (a) the original semi-annual yield to maturity multiplied by the current book value less (b) the current interest payment. See: COMPOUND ACCRETED VALUEDISCOUNT; MARKET DISCOUNT BOND; ORIGINAL ISSUE DISCOUNT. Compare: AMORTIZATION OF PREMIUM. 

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