what is accretion 
accretion is the gradual and incremental growth of assets and earnings due to business expansion a company s internal growth or a merger or acquisition in finance accretion is also the accumulation of the additional income an investor expects to receive after purchasing a bond at a discount and holding it until maturity the most well known applications of financial accretion include zero coupon bonds or cumulative preferred stock understanding accretionin corporate finance accretion is the creation of value through organic growth or through a transaction for example when new assets are acquired at a discount or for a cost that is below their perceived current market value cmv acccretion can also occur by acquiring assets that are anticipated to grow in value after the transaction in securities markets purchasing bonds below their face or par value is considered buying at a discount whereas purchasing above the face value is known as buying at a premium in finance accretion adjusts the cost basis from the purchase amount discount to the anticipated redemption amount at maturity for example if a bond is purchased for an amount totaling 80 of the face amount the accretion is 20 as interest rates increase the value of existing bonds declines which means that bonds trading in the market decline in price to reflect the interest rate increase since all bonds mature at the face amount the investor recognizes additional income on a bond purchased at a discount and that income is recognized using accretion the rate of accretion is determined by dividing the discount by the number of years in the term in the case of zero coupon bonds the interest acquired is not compounding while the bond s value increases based on the agreed upon interest rate it must be held for the agreed upon term before it can be cashed out assume that an investor purchased a 1 000 bond for 860 and the bond matures in 10 years between the bond s purchase and maturity dates the investor needs to recognize additional income of 140 when the bond is purchased the 140 is posted to a discount on the bond account over the next 10 years a portion of the 140 is reclassified into the bond income account each year and the entire 140 is posted to income by the maturity date the earnings per share eps ratio is defined as earnings available to common shareholders divided by average common shares outstanding and accretion refers to an increase in a firm s eps due to an acquisition the accreted value of a security may not have any relationship to its market value examples of accretionfor example assume that a firm generates 2 000 000 in available earnings for common shareholders and that 1 000 000 shares are outstanding the eps ratio is 2 the company issues 200 000 shares to purchase a company that generates 600 000 in earnings for common shareholders the new eps for the combined companies is computed by dividing its 2 600 000 earnings by 1 200 000 outstanding shares or 2 17 investment professionals refer to the additional earnings as accretion due to the purchase as another example if a person purchases a bond with a value of 1 000 for the discounted price of 750 with the understanding it will be held for 10 years the deal is considered accretive the bond pays out the initial investment plus interest depending on the type of bond purchase interest may be paid out at regular intervals such as annually or in a lump sum upon maturity if the bond purchase is a zero coupon bond there is no interest accrual instead it is purchased at a discount such as the initial 750 investment for a bond with a face value of 1 000 the bond pays the original face value also known as the accreted value of 1 000 in a lump sum upon maturity a primary example within corporate finance is the acquisition of one company by another first assume the earnings per share of corporation x is listed as 100 and earnings per share of corporation y is listed as 50 when corporation x acquires corporation y corporations x s earnings per share increase to 150 this deal is 50 accretive due to the increase in value the accretion of a discount is the increase in the value of a discounted instrument as time passes and the maturity date looms closer however sometimes long term debt instruments like car loans become short term instruments when the obligation is expected to be fully repaid within one year if a person takes out a five year car loan the debt becomes a short term instrument after the fourth year 