Stocks

Unamortized Bond Discount

Unamortized Bond Discount

What Is an Unamortized Bond Discount?

An unamortized bond discount is an accounting methodology for certain bonds. It represents the difference between the par value of a bond and the proceeds from its sale, after subtracting the portion that has already been amortized on the profit and loss statement.

Key Takeaways

  • An unamortized bond discount is the difference between a bond’s face value and the amount investors actually paid for it.
  • The bond issuer gradually writes off a bond discount as an interest expense. The remaining amount is the unamortized bond discount.
  • An unamortized bond premium is the opposite of an unamortized bond discount, occurring when a bond sells for more than its face value.

How Unamortized Bond Discount Works

The discount refers to the difference between the cost to purchase a bond and its face value. The issuing company can choose to expense the entire discount or amortize it as an asset. Any unamortized amount is known as the unamortized bond discount.

A bond discount occurs when the bond’s interest rate is lower than comparable market rates. Investors will require a discounted price to purchase the bond.

Bond prices and interest rates are inversely related. If interest rates rise after a bond is issued, the bond will trade at a discount to its face value.

Accounting for the Unamortized Bond Discount

If a bond discount is immaterial, the issuer can write off the entire amount at once, eliminating any unamortized bond discount. However, if the discount is material, it is typically amortized over the bond’s life until it is retired.

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The unamortized bond discount can turn into a recognized capital loss if the bond is sold before maturity or decrease as the bond’s market price approaches its par value over time.

Unamortized Bond Premium

An unamortized bond premium is the opposite of an unamortized bond discount. It occurs when a bond sells for more than its face value. The unamortized bond premium represents the excess amount between the face value and the sale price, minus the interest. The issuer gradually amortizes this premium against future expenses.

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