How to calculate the amortized cost of a bond

Written by carter mcbride
  • Share
  • Tweet
  • Share
  • Pin
  • Email
How to calculate the amortized cost of a bond
Calculating the Amortized Cost of a Bond (stationary image by pix29 from Fotolia.com)

Amortisation occurs on a bond when someone sells a bond on a premium or discount. A premium is when the market's interest rate is lower than the stated interest rate on the bond. A discount is when the market's interest rate is higher than the stated interest rate on the bond. There are two methods to compute the bond amortisation--the straight-line method and the effective interest rate method. Amortisation of the premium decreases interest expense each month. Amortisation of the discount increases interest expense each month.

Skill level:
Moderate

Other People Are Reading

Instructions

    Straight-Line Method

  1. 1

    Determine the premium or discount and the number of months left outstanding on the bond.

  2. 2

    Divide the premium or discount by the number of months left outstanding on the bond to arrive at bond amortisation.

  3. 3

    Multiply the bond's face value by the stated interest rate on the bond, and then subtract the premium amortisation, or add the discount amortisation to arrive at interest expense.

    Effective Interest Rate Method

  1. 1

    Multiply the beginning carrying value of the bond by the effective interest rate to arrive at interest expense.

  2. 2

    Subtract the cash paid from the interest rate to determine the amortisation of the discount, if purchasing the bond at a discount.

  3. 3

    Subtract the interest rate from the cash paid to determine the amortisation of the premium, if purchasing the bond at a premium.

Don't Miss

Filter:
  • All types
  • Articles
  • Slideshows
  • Videos
Sort:
  • Most relevant
  • Most popular
  • Most recent

No articles available

No slideshows available

No videos available

By using the eHow.co.uk site, you consent to the use of cookies. For more information, please see our Cookie policy.