Explain the amortization of a bond premium. Identify and describe the amortization methods available

Expert Solution

If a company issues bonds and investors pays more than the face value of such bonds then that excess amount will be treated as Premium and the company needs to amortize it over terms of the bond in order to close that premium account. Due to this amortization, the interest expense will be decreased by the company in its books. There are many methods available for amortization bonds but the main commonly used methods are -

a) Straight-Line Method - The premium is calculated by subtracting the face value of the bond from the purchase price and it is divided by the total number of periods of the bond. In simple words, it amortizes a fixed amount in each period over the life of the bond.

b) Effective Interest Method - This method uses the market interest rate of the bond based on the book value of the bond as the premium is amortized by multiplying the market interest rate by the book value of the bond.

ekkarill92 answered 2 months ago

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