Accreted Value in simple terms refers to an investment value in which returns from the investment are reinvested throughout the term of the investment instead of being paid out to investors. Accreted Value is usually calculated for balance sheet purposes and includes the interest accumulated even though the interest is not paid until the maturity date of the bond. Accreted Value of a bond largely does not have any relationship with its market value.
Certain kinds of investments such as Savings Accounts and regular bonds pay out interest to the investors on a regular basis, however investment vehicles like Zero-Coupon bonds reinvest the interest back into the investment. Whatever interest earned the investors would have received gets accumulated until the date on which the maturity of the investment.
While, reading about articles on bonds and other investment methods, you might have come across the term Compounded Accreted Value (CAV) which is a little different from accreted value. If the choice of investment allows the facility of earning interest on the accrued interest, then the value of that investment is referred as CAV.
Example:
An investor buys a zero-coupon bond with a face value of 1000 rupees, a 0.5 percent annual interest rate and a 5-year term.
The bond’s accreted value increases by 0.5 percent to 1005 rupees when the interest for the first year of the term is added to the bond’s value. 2 years into the term, the accreted value of the bond is 1010.05 rupees and so forth. At the end of the 5-year term the final accreted value paid out to the investor would be 1025.25 francs.
The amount paid out would be made up of the principal i.e RS 1000, accrued interest (0.5 % of 1000 francs x 5 years = 25 rupees) and compound interest earned on accrued interest (0.25 paisa)
If the investor were to buy a regular bond with the same face value, the investor would receive the interest annually, the coupon payment of 5 rupees throughout the term (5 years) and at the end of 5 year, the principal amount which is Rs 1000.