Definition
The term accrual bond refers to a security that does not make periodic interest payments to the bondholder. As interest accrues, it is added to the principal of the bond and paid to the investor when the security matures.
Explanation
In the same way a zero coupon bond does not pay periodic interest, an accrual bond also defers these payments. At some point in time, or at maturity, the bond begins to make both accrued principal and interest payments.
Collateralized mortgage obligations (CMO) can have a tranche that behaves like an accrual bond. Instead of this tranche making interest and principal payments to its investors, this money is used to pay down the principal and interest of other tranches in the CMO. At a future point in time, this accrual tranche would begin making interest and principal payments too.
Since the payments to bondholders are delayed, an accrual bond has the advantage of offering investors lower reinvestment risk. As is the case with zero coupon bonds, the value of accrual bonds is very sensitive to a change in interest rates.
Related Terms
The cash basis accounting method calls for the recording of economic business events as cash is received or paid. Therefore, the cash method of accounting requires the reporting of revenues when cash is received from customers and payments are made for expenses.
Moneyzine EditorNovember 6th, 2024
Also referred to as "receivables," this is the accounting term used to describe claims the company has against others for goods, services, or money. Accounts receivable are usually non-written promises to pay for goods or services received but not yet paid for by a customer.Moneyzine EditorNovember 6th, 2024
Also referred to as "payables," this is the accounting term used to describe balances owed to trade partners for materials, supplies, goods and services that were purchased on credit. Accounts payable recognizes the timing difference between the company's receipt of the benefit or asset, and the payment for this expense.Moneyzine EditorNovember 6th, 2024
The financial accounting term accrued expense refers to costs incurred during an accounting period, but not yet paid for in cash by a company in that same accounting period.Moneyzine EditorNovember 6th, 2024
The financial accounting term accrued revenue refers to income earned during an accounting period, but not yet recorded or received prior to the company's financial closing date.Moneyzine EditorNovember 6th, 2024
The term commodity-backed bonds refers to debt securities that are linked to the price of a commodity. These securities are typically issued in one of two ways. The rate of interest paid on the bond can change as the price of the commodity fluctuates. Alternatively, the face value of the bond can increase or decrease as the price of the commodity changes.Moneyzine EditorJanuary 11th, 2024
The financial accounting term deep discount bonds refers to indentures that are sold at a price significantly lower than face value, typically 20% or more. Deep discount bonds can also include zero coupon bonds, which do not pay a rate of interest to the holder.Moneyzine EditorJanuary 15th, 2024
The term accrued market discount refers to the increase in the value of a bond as it approaches the day it is redeemable at par. The calculation of a bond's accrued market discount is not affected by falling interest rates.Moneyzine EditorJanuary 3rd, 2024
The term accrued interest refers to the funds that are payable but not yet received because of a timing difference of cash flows. Accrued interest is oftentimes use in the context of a bond or another type of fixed income security.Moneyzine EditorJanuary 3rd, 2024
The term adjustment bond refers to a security issued when a corporation is recapitalized during a bankruptcy proceeding. Adjustment bonds are issued in exchange for the outstanding debt of an organization, typically with terms that will help the corporation successfully emerge from bankruptcy.Moneyzine EditorNovember 6th, 2024
The term agency security refers to bonds issued or guaranteed by a federal agency or those issued by a government-sponsored enterprise. Agency securities are considered low risk investments.Moneyzine EditorNovember 6th, 2024
