# How to calculate the amortized cost of a bond

Written by carter mcbride
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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

## 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.

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