Compound Accreted Value
Recall that an original issue discount bond is sold by the issuer in the primary market at a price that is deeply discounted from par (face value). In lieu of earning interest, bondholders will receive the bond’s par value at maturity.
Like other bonds, the book value of an OID bond at issuance is equal to the bond’s issue price. However, the issue price of an OID bond is not its face value. Nor is its book value constant over time. It accretes from year to year until at maturity it equals its face value. Book value for an OID bond is its issue price plus its accreted value over time. Book value for an OID bond is called its compound accreted value.
Compound accreted value is the issue price plus the sum of the annual accretion from year to year. But annual accretion for an OID bond has a different computation from other kinds of bonds. Unlike a bond issued at par, accretion is based on the difference between the face value of the OID bond and its issue price, not the investor’s purchase price. Annual accretion, therefore, is determined by the full term of the