What Is Bond Premium Amortization?

The amortization method of bond premium and discount refers to the method of amortizing the premium discount amount during the bond's duration after the enterprise purchases the bond at a premium or discount. There are two amortization methods for the premium and discount of bonds purchased by enterprises: the straight-line method and the actual interest rate method. The straight-line method is a method of amortizing the premium and discount of the bonds purchased by the enterprise into the bond holding period. In each interest-bearing period of the bond, convert the bond discount plus accrued interest income into investment income at the same amount, or use the premium of the bond to offset the accrued interest income with equal amounts as investment income. The premium and discount of the bonds based on the actual interest rate method are obtained based on the difference between the interest calculated by multiplying the present value of the bond's face value by the actual interest rate and the coupon interest. Premium amortization is inversely proportional to interest income; discount amortization is directly proportional to interest income. In theory, the real interest rate method is more accurate than a straight line, but the real interest rate method is cumbersome to calculate. Therefore, the straight line method is mostly used in practice ^[1] .