Accrued Market Discount
The bonds in the oil well driller looked just fine when they were issued by the company right around par value of $1,000 with a 6% coupon. But that earthquake and tsunami didn't mesh well with the angry sperm whale invasion, and when the platform came loose, bad things happened to the bonds. They cratered to $600 and sat there. It was then that you bought them.
The flavor of bond you purchased comes due in six years, and it carries what's called an accrued market discount. Each year, that bond will come closer to owing its full principal, and you as the holder may have to pay the gain as that market discount comes closer to par value. Note that, if the bonds are truly in danger of not paying, then you don't pay tax, and the bond likely sits in the doldrums at some very low price. That delta between what you paid for the bond and its expected eventual principal return value of $1,000 par is the accrued market discount.
Related or Semi-related Video
Finance: What is Accrual Accounting?39 Views
Finance a la shmoop... what is accrual accounting? well there are two
religions in the way in which beans get counted the first is cash accounting [Cash accounting building]
which just tracks cash in the door and cash out the door in any given period [Cash enters door and exits]
the second is accrual accounting which tries to guess or impute the values
coming in and going out in a given firm hoping to give a true picture of how
well or poorly a company is performing financially and you might ask how cash
and accrual accounting can be different like aren't beans just beans that you
count well stay tuned here in accrual accounting you might have an obligation
like an employee bonus which you think is highly likely to be paid at the end [Employee happy at getting a bonus]
of the year almost treated like debt the employee makes 6 grand a month and is
very likely due 10 grand in bonus money at the end of the year it's payable on
December 31 that's when the cash would go out the door of the company but given [Cash exiting the door]
that it's highly likely to be paid or earned by the employee so they'd have a
legal claim on that 10 grand the company using accrual accounting would accrue
the liability labeled something like bonuses or or is it bony well something
like that bonus is payable.. and would accrue the
value of 10 grand divided by 12 because that's the number of months in a year in
California anyway or about 833 dollars a month throughout the year that's how you [Employee bonus divided by 12 months calculation]
would accrue for that likely bonus now promising an employee a bonus and not
giving it to them after they've earned it well that would be a cruel accounting [Person holds out cash to employee and takes it away]
a totally different thing and much more mean-spirited
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