What Does Accretion Mean?

Table of Contents

5. Is Accretion the Same as Market Value?

6. What Is the Difference Between Accretion and EPS?

Accretion is a finance term, but learning about it will help you understand your investments, business, or other assets. In this article, we’ll look at what accretion means and how it works.

What Is Accretion?

Accretion can mean different things depending on the context.

Business: In business, accretion is the increased earnings of a business due to growth. It usually refers to growth after a business expands or acquires another business.
Bonds: In the context of a bond, accretion is the growth of the bond at maturity from its discounted purchase price. In order to calculate the accretion rate, divide the discount received on the bond purchase price by the number of years left until maturity.
Investing In investing, accretion is an increase in value due to the terms of the transaction (discounted asset or an asset likely to experience significant growth) or through organic growth.

How do you use accretion in a sentence? An example is: During the complex merger negotiations, the commercial attorney meticulously analyzed the accretion of assets to ensure a fair and legal agreement.

Accretion Explained

Accretion most commonly occurs when you buy assets at a discounted rate. When buying bonds, this means purchasing a bond for less than the face value. When buying other assets, this means purchasing an asset for less than its perceived current market value.

Let’s say you purchase a bond for 90% of its face value, in that case, the accretion is 10%.

The accretion rate factors in the time left until maturity. So if there are 2 years left until the bond’s maturity, then the accretion rate is 5%.

Let’s look at accretion in more detail.

Interest Rates and Bonds

One of the most common reasons for a discounted bond price will be because of a change in interest rates. A bond’s value decreases in relation to increases in interest rates. This allows investors to pick up discounted bonds.

This discounted rate means that the investor will receive income at the date of maturity. Accretion is used as a measure of that income.

A fundamental principle of bond investing is that market interest rates and bond prices generally move in opposite directions. When market interest rates rise, prices of fixed-rate bonds fall.

Accretion Rate

The accretion rate is calculated using the following formula:

The discount divided by the number of years left until maturity.

The years left until maturity are important because the bond income will be reclassified each year. Accretion measures that incremental value increase rather than the entire amount at maturity.

For example, let’s say that you purchased a bond with a face value of $500, but you only paid $400, and the bond term is 10 years. Between now and the maturity date, you will receive $100 in increments.

Accretion refers to the $100 difference in value that you will receive. Accretion does not refer to any interest that may be paid on the bond during the 10-year term.

Is Accretion the Same as Market Value?

No, it is not always the same as market value. Accretion refers to the difference in value between the purchase price and the expected value at maturity. Market value is the perceived value of the asset according to the market.

Aspect	Accretion	Market Value
Definition	Accretion is the gradual growth or increase in value of an asset, often due to natural growth or the accumulation of income and interest over time.	Market value refers to the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently, and without compulsion.
Application	Commonly used in finance to describe the process by which a bond’s value increases over time as it approaches maturity, and the discount from its face value decreases.	Used broadly in various fields, including real estate, finance, and economics, to determine the current worth of assets such as property, stocks, or businesses.
Measurement	Measured based on the internal growth or accrual of value over time, often calculated using interest rates or other growth metrics.	Determined by current market conditions, including supply and demand dynamics, economic factors, and perceived value by buyers and sellers.
Relevance	Particularly relevant in fixed-income investments and accounting, where it’s important to track the increase in value of discounted securities over time.	Relevant in transactions, taxation, business evaluations, and investment analysis, where current market conditions significantly impact the valuation.
Factors Influencing	Influenced by the interest rate environment, creditworthiness of the issuer, and time to maturity for bonds.	Influenced by external market conditions, industry trends, economic factors, and the overall business environment.
Volatility	Generally, less volatile as it is based on predefined factors like interest rates for bonds.	Can be highly volatile, subject to rapid changes based on market perceptions and economic conditions.
Objective	To understand the growth in value of an asset over time, especially in context of fixed-income securities.	To establish a fair price for an asset at a given point in time, reflective of its perceived worth in the open market.

What Is the Difference Between Accretion and EPS?

EPS stands for earnings per share. You may have seen EPS ratios published for publicly traded companies. That ratio is calculated as:

Earnings available to shareholders divided by the average outstanding shares.

Accretion is not related to EPS, but it will measure the difference in EPS if a company’s EPS changes due to expansion.

Aspect	Accretion	Earnings Per Share (EPS)
Definition	Accretion is the gradual and incremental growth in the value of an asset, often due to natural growth or the accumulation of income and interest over time.	EPS is a financial metric that measures the portion of a company’s profit allocated to each outstanding share of common stock, serving as an indicator of a company’s profitability.
Application	Commonly applied in finance to describe the growth in value of bonds or investments over time, especially when they are acquired at a discount to their face value.	Used widely in stock market analysis to assess the profitability of a company on a per-share basis, often influencing investment decisions.
Calculation	Calculated based on the growth or accrual of value over time, considering factors like interest rates, dividends, or internal growth.	Calculated by dividing the company’s net income by its total number of outstanding shares. It can be adjusted for extraordinary items and potential share dilution.
Relevance in Finance	Relevant in investment analysis for bonds, fixed income securities, and mergers and acquisitions where asset value appreciation is considered.	Crucial for investors and analysts in evaluating a company’s financial health, stock valuation, and comparing profitability across companies and industries.
Impact of Market Conditions	Influenced by the interest rate environment and creditworthiness of the issuer.	Influenced by the company’s net income, which can be affected by market conditions, operational efficiency, and management decisions.
Use in Investment Decision	Used to assess the value increase of specific investments over time, especially in fixed-income portfolios.	Used by investors to gauge a company’s financial performance and to compare it with others in the industry.
Visibility	More specific to certain types of investments like bonds and does not apply broadly to all assets.	Highly visible and commonly reported in a company’s financial statements, easily accessible to investors.
Example	The accretion of a discount bond’s value as it approaches its maturity date, gradually increasing to its face value.	A company reporting an EPS of $2.00, indicating that each share of its stock represents $2.00 of the company’s profits.

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