Unleashing Potential: How Accretion of Discount Boosts Investments
Related Terms: capital gains, yield to maturity, coupon rate, constant yield method, adjusted cost basis.
References
Get ready to put your knowledge to the test with this intriguing quiz!
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## What is "accretion of discount" in finance?
- [ ] The loss of value in a financial asset over time
- [x] The gradual increase in the value of a discounted financial instrument as it approaches maturity
- [ ] The sudden drop in asset prices due to market volatility
- [ ] The issuance of new equity shares by a company
## Which type of financial instruments commonly experience accretion of discount?
- [ ] Dividend-paying stocks
- [ ] Variable rate loans
- [x] Zero-coupon bonds
- [ ] Preferred shares
## How is accretion of discount typically recorded in financial accounting?
- [ ] As a liability
- [x] As interest income
- [ ] As operating expense
- [ ] As capital expenditure
## Why is accretion of discount important for investors?
- [ ] It helps determine the stock dividend
- [ ] It indicates government policy changes
- [x] It provides insight into additional returns over time
- [ ] It affects trade balance
## What is the impact of accretion of discount on a bond's yield?
- [ ] It decreases the bond's yield
- [x] It increases the bond's yield
- [ ] It has no impact on bond's yield
- [ ] It leads to negative yield
## What accounting method is commonly used to recognize accretion of discount?
- [ ] Cash-based accounting
- [ ] Accumulate wealth method
- [x] Amortization
- [ ] Consolidation
## Which financial statement is directly affected by accretion of discount?
- [ ] Balance Sheet
- [x] Income Statement
- [ ] Statement of Cash Flows
- [ ] Equity Statement
## Which of these is a key characteristic of zero-coupon bonds related to accretion of discount?
- [ ] They pay interest regularly
- [x] They do not pay periodic interest, but are sold at a discount and mature at par value
- [ ] They have a fixed dividend yield
- [ ] They have floating coupon rates
## How does accretion of discount affect bondholders' taxable income?
- [ ] It has no effect on taxable income
- [x] It increases bondholders' taxable income
- [ ] It decreases capital gains
- [ ] It provides tax deductions
## Which type of investor is most likely to be concerned with accretion of discount?
- [ ] Short-term traders
- [ ] Equity investors
- [x] Fixed-income investors
- [ ] Currency traders
