What is the amortization of Bond Premium?
Bond premium amortization is a method in accounting that companies use to record payments that promote bond holders over the nominal value of their bonds plus interest payments. While investors do not see any resolution between interest and premium payments, companies must monitor these differences. They ensure that the bonus is repaid when the bond ripens so that the flow of payments is that it was expected to sell a bond. They trade a number of payments for the purchase price paid by the investor. Of the traditional credit conditions, vapor or nominal value is the main loan, while the coupon rate is the interest rate. Recently, the company will pay the investor the nominal value of the bond, which is similar to individual debtors must repay the entire principal of the loan when paying on the balloon at the end of the payment flow to the not amortizing loan.
bonds are appreciated according to the current value of future payments they promise. If the coupon rate is the same as the market interest rate, then the currentThe calculation of the value will wash out the interest and the price will be a nominal value. If the coupon rate is below the market interest rate, the bond is less valuable and is said to be sold with a discount. If the coupon rate is higher, the price of bonds is higher than the nominal value. The difference between price and nominal value is called Bond Premium.
bond premium is not charged in the traditional design of the principle and interest, but must be paid. Instead of adding it to the main, the company pays part of the bonus within each coupon. This process is called the amortization of Bond Premium. Nothing will change for the investor as a result of bond amortization; Bonds pay coupons and facial value Laid in their contracts regardless of whether they are sold with a discount or bonus. However, the company must distinguish between interest payments and premium amortization in its accounts.
It is often amortized by bonds because market interest rates change just before the bond problem is released. Rather than overwrite contracts, a company forHe gives bonds for bonuses. The amortization of this bonus avoids the change in bond conditions to reflect the market rate. The amortization of bond premium is commonly equal, which means that the same amount is amortized in each period.