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Definition: Accrual Bond
An Accrual bond is a fixed interest rate bond which is similar to a zero coupon bond with the only exception that the interest payments are accrued to the principal value and paid at maturity. This type of bond is generally sold at a deep discount and matures at its face value.
The major advantage of such bonds is that the investor doesn’t face the reinvestment risk, on the contrary, he loses the opportunity to gain from favourable market conditions and interest rate changes have a significant impact on this bond. Also, the major disadvantage is phantom income i.e. the investor needs to pay tax even for the interest that he doesn’t get and is accrued to the bond.