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

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## Instructions

- 1
Determine the premium or discount and the number of months left outstanding on the bond.

- 2
Divide the premium or discount by the number of months left outstanding on the bond to arrive at bond amortisation.

- 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.

## Straight-Line Method

- 1
Multiply the beginning carrying value of the bond by the effective interest rate to arrive at interest expense.

- 2
Subtract the cash paid from the interest rate to determine the amortisation of the discount, if purchasing the bond at a discount.

- 3
Subtract the interest rate from the cash paid to determine the amortisation of the premium, if purchasing the bond at a premium.