An accumulation bond is a type of security that is sold for less than the face value of the bond, but will eventually return to the original face value over a period of time that is specified at the time of purchase. Here are a couple of examples of how accumulation bonds work, and why they may be a good idea.
Sometimes referred to as a discounted bond, the accumulation bond works in a manner similar to purchasing a savings bond and allowing it to mature before eventually cashing it in. The difference is that a savings bond is purchased for the amount of the face value, with the understanding the value of the bond will increase as it matures. Discounted bonds work in just the opposite way.
As an example, the accumulation bond may be purchased for a price that amounts to 80% of the face value, with the understanding that the bond will accrue interest that will allow it to yield the entire face value at the point of maturity. In a sense, choosing to invest in bonds that are discounted on the front end is a way of ensuring that by a given point in time, you will have a fixed amount of worth represented by the bond.
One thing to be clear on is that while an accumulation bond is a discounted bond, it is not referred to as a discount bond. The concept behind a discount bond is very different. Whereas the discounted accumulation bond will not pay off until it reaches maturity, the discount bond will pay out ongoing interest to the holder of the bond for as long as the discount bond is kept operating. Thus, the accumulation bond is a way for saving for the future, while the discount bond is a way to create a steady revenue stream, using your resources to generate revenue in the form of interest payments.
As a rule, accumulation bonds will mature in a reasonable amount of time, and will yield more earned interest than could be obtained by a standard savings account. In fact, the accumulation bond can often create additional assets with more reliability than a number of investment options. However, it is important to understand that an accumulation bond is considered to be a safe investment, so the return is not likely to make anyone wealthy overnight. Still, the accumulation bond is a great way to make funds that you do not anticipate needing for daily living expenses and build up a credible nest egg for the future.
