What is an Accrued Market Discount?
Accrued market discount refers to the steady increase in value of a discounted bond from the time of purchase until maturity.
How Does an Accrued Market Discount Work?
The accrued market discount is a discount bond's increase in value resulting from the approach of its maturity date rather than a drop in interest rates. This occurs because the holder will receive the par value in full upon maturity, regardless of the amount by which a bond was discounted at the time of purchase. The accrued market discount is the purchase price of the bond subtracted from the bond's market value at any point in time following its purchase.
To illustrate, suppose a bond with a $1,000 par value is purchased at a discount price of $600 and four years remaining until maturity. Over the next four years, the market value of the bond will slowly move from $600 to $1,000 as the maturity date nears. If the holder wishes to sell the bond one year later for $700, the accrued market discount would be calculated as follows:
$700 current value - $600 purchase price = $100 accrued market value
The accrued market discount, in this instance, would be $100.
Why Does an Accrued Market Discount Matter?
The accrued market discount on a discount bond represents the value appreciation that results from an approaching maturity date rather than favorable interest rate fluctuations.