Accretive

What is Accretive?

Whether you talk about general dictionary or specifically about the finance domain, accretive is considered an adjective form of accretion, which means incremental or gradual growth. For instance, a deal of acquisition might be called accretive for the company if that deal comprises an increase in the Earnings Per Share.

As far as the definition is concerned, in corporate finance, accretive businesses or asset’s acquisition should add more value to the company in comparison to the expenses related to that acquisition. This can be easily done as the lately-acquired assets are bought at a discount in comparison to their current Market value.

Talking about Accretive

In simple finance, accretion means the change in the security’s or bond’s price. In fixed-Income investments, it could be used to describe the value increase related to the interest that has been accrued but not paid.

For instance, discounted Bonds earn interest via accretion until they mature. In these cases, acquired bonds get acquired at a discount in comparison to the bond’s current Face Value, which is also known as the Par. With the bond’s maturity, the value increases.

The Rate of Accretion

The accretion rate is comprehended by dividing the discount by the years in term. As far as zero-coupon bonds are concerned, the interest gained is doesn’t get compounded. Although the bond’s value increases on the Basis of agreed-upon interest rate, it has to be held for the agreed term before the investor can cash it out.

Accretion Example Explained

If you buy a bond that has a value of Rs. 1,000, for the discounted price of Rs. 750 and hold it till 10 years, this deal will be considered as accretive as the bond is paying out the initial investment along with interest.

Zero-coupon bonds don’t come with any interest accrual. On the contrary, they are bought at a discount like the initial Rs. 750 investment for the bond that has a face value of Rs. 1,000. Upon maturity, such bonds will pay the original face value, which is known as the accreted value.

Often, in corporate finance acquisition, deals are accretive. For instance, let’s assume that a company’s Earnings per share are listed at Rs. 100 and earnings per share of another company are listed as Rs. 50. When the first company acquires the second, the earnings per share of the former will be Rs. 150, which will make it a 50% accretive deal.