What is an Accrual Bond?

An example of a type of bond that carries a fixed interest, the accrual bond is issued at the face value of the bond, and will earn a specified rate of interest that will not be paid until the bond reaches maturity. When the matured accrual bond is presented for payment, the holder will recover both the original face value of the bond and the interest that was accrued from the time of purchase to the maturation date. Here are some examples of how the use of the accrual bond can be a good financial move.

Accrual bonds are an excellent way to make a safe investment with funds that will not be required for other uses in the foreseeable future. Since the resources used to purchase the bonds will not be available until the bonds have reached maturity, there is no temptation to spend the funds. At the same time, there is every incentive to not attempt to cash in the bonds for any reason, as that would lead to a default of any interest on the face value of the accrual bond.

As a tool to help teach basics of investing, the accrual bond is a great place to begin. Accrual bonds can be ideal ways to save for everything from a college education to building up reserves for a down payment on a piece of property. The key is to make sure the funds used to purchase the accrual bond will not be required for usual expenses in the interim.

Interest rates on the accrual bond will vary somewhat from country to country. Also the means of calculating the amount of interest may vary as well. For example, accrued interest on accrual bonds is compounded in Germany. That is not always the case in all countries. Before the purchase of an accrual bond, it is a good idea to understand exactly how the interest will be calculated, so there is a reasonable expectation of the amount of return on the investment.

There is some confusion between the function of an accrual bond and a bond that pays no coupons. It is important to realize that bonds with no coupons are sold at discount prices, with the expectation that the bond will pay the face value of the bond upon maturity. No coupon payments do include interest earned, but the interest will only add to the purchase price to achieve the face value of the bond, with no additional resources generated. While no coupons bonds are a good way to generate extra assets, the process is different from an accrual bond, although the result in both cases is earning some amount of interest above the purchase price for the bonds.