InvestorQ : What is an accumulation bond?
nishi Shah made post

What is an accumulation bond?

tanvi Patel answered.
3 years ago

Before diving into n accumulation bond, one should know what is a bond. A bond is a debt-instrument that specifies the condition on which borrower or issuer has borrowed money from the lender or bondholder. These conditions generally include interest rate and tenure at which money is borrowed. Interest rate is also referred as “Coupon”. Generally, a bond is issued by private corporations and the government. The private corporation includes both, listed and non-listed companies.

Now coming to Bond functionality. The borrower in case of a bond, the issuer pays interest to the lender, that is the bondholder with a promise to repay the principle and with the interest amount. This interest is the motive for which a person invests or buys a bond. So if a bond is of Rs. 100 at an interest rate of 10%, this means that the bondholder will buy or lend Rs. 100 and get 10%, that is, Rs. 10 at a defined interval. After the tenure, the issuer will pay the principal plus interest rate, that is Rs. 110.

But in case of an accumulation bond, the bond is sold by the issuer at less than its face value and redeem at face value. So, in the above example, the buyer or lender will buy a bond at 10% discount, that is Rs. 90 and after completion of tenure, buyer or the bondholder will receive Rs. 100. This difference in the issue and redeem price is the benefit for the bondholder. It should be noted to explain in simple terms I have not taken tenure into the consideration.