Definition of Accretion

Accretion is an accounting method used to step up an investor’s cost base for a bond purchased at a discount from its par value.

Applying "Accretion" to Securities Exams:

Certain municipal bonds purchased at a discount (a price less than par value) must have their cost base stepped up over the remaining life of the bond for tax purposes. If a $1,000 par value bond is purchased at $900 ( a $100 discount ) with 10 years to maturity, the investor must add $10 each year to their income as a result of holding the bond. The amount by which the cost basis of the bond is stepped up is found by taking the full amount of the discount from par and dividing it by the number of years remaining until maturity.

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