Accretion in Cryptocurrency: What You Need to Know
Accretion is the profit made on the difference between the discounted purchase price and the nominal value of an asset.
What is Accretion?
Accretion (discount) is the profit an investor makes after buying assets at a discount. The investor gradually earns the difference between the discounted purchase price and the face value of the bond by holding it to maturity.
Accretion in corporate finance is the value arising from a merger or acquisition of another company. The total shareholder value increases, which raises earnings per share (EPS).
How do you calculate an accretion?
If you buy a bond at a price below par, this is an accretion and allows you to earn. How does it work?
Suppose you buy a bond at a discounted price of $800. The par value of the bond is $1,000. You keep the bond until the maturity date. When the bond matures, you receive interest on the difference between the par value and the discount price. That is, if you bought the bond for only $800, you will get $200. You also get interest on the face value of the bond of $1,000.
When the bond reaches maturity, the interest is paid in a lump sum or annually. You can use either the linear method or the constant yield method to determine the interest on the bond. Suppose that the bond matures in five years. The face value of the bond was $500 more than you paid for it.
There are 20 financial periods until the bond matures, because the issuer of the bond reports its financial position every quarter. Each quarter before the bond matures, you can get a $25 increase (if you divide the discount [$500] by the length of the financial periods [20]). Until the bond’s maturity date, its value will increase by $25 every three months.
The constant yield method assumes that the value of a bond increases as it approaches its maturity date. This means that some financial periods, especially those approaching the end of a bond’s life, will yield greater benefits.
Accrual amount = Purchase basis x (YTM/ Accrual periods per year) - Coupon interest.Using this approach, the yield to maturity (YTM) must first be obtained to calculate the accrual of the discount.
The yield on a bond held to maturity is called the YTM. The frequency of income compounding has a large impact on YTM.
By the maturity date, both calculations of the discount accrued on the bond give a yield. A constant yield strategy allows the bond issuer to buy additional time before it has to increase the value of the bond.
