About Amortization/Accretion
- Nancy Cohn (Deactivated)
Bonds are either amortized or accreted in order to recognize the effect to income from appreciation or depreciation over the life of the bond, allowing a fund to recognize a constant rate of income over the life of the investment. Definitions of amortization and accretion and related terms follow:
Amortization is the process of writing off an intangible asset investment over the projected life of the asset. It applies to securities bought at a premium (price greater than par), where charges are made against the interest earned on bonds in order to offset the premium paid on the bond. Thus, bonds bought at a premium must be amortized down to par by the time the bond matures.
Accretion applies to securities bought at a discount (price less than par), whether it is at Acquisition/Market Discount or original issue discount. Accretion is the addition to book value contributed to bonds purchased below par, and bonds must be accreted up to par prior to the bond maturing.
Acquisition Discount refers to purchasing a security below the security's adjusted issue price.
Market Discount refers to buying a non-OID eligible bond below the security's redemption value.
Original Issue Discount (OID) Amortization is the amortization of the original discount of the security at the time of issuance of the bond.