What is an Accrual Bond?
Source: http://www.investorwords.com/62/accrual_bond.html Definition A bond that pays no coupons, is sold at a deep discount to its face value, and matures at its face value. An accrual bond has the important advantage of being free from reinvestment risk, though the downside is that there is no opportunity to enjoy the effects of a rise in market interest rates. Also, such bonds tend to be very sensitive to changes in interest rates, since there are no coupon payments to reduce the impact of interest rate changes. In addition, markets for zero-coupon bonds are relatively illiquid. Under U.S. tax law, the imputed interest on a zero-coupon bond is taxable as it accrues, even though there is no cash flow. also called zero-coupon 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
