Unamortized Bond Discount

What Is an Unamortized Bond Discount?

An unamortized bond discount is an accounting methodology for certain bonds. The unamortized bond discount is the difference between the par value of a bond — its value at maturity — and the proceeds from the sale of the bond by the responsible company, less the portion that has previously been amortized (written off in progressive augmentations) on the profit and loss statement.

How Unamortized Bond Discount Works

The discount alludes to the difference in the cost to purchase a bond (its market price) and its par, or face, value. The responsible company can decide to expense the whole amount of the discount or can handle the discount as an asset to be amortized. Any amount that presently can't seem to be expensed is alluded to as the unamortized bond discount.

A bond discount to par value happens when the current interest rate associated with a bond is lower than the market interest rate of issues of comparative credit risk. In the event that on the date a bond is sold, the listed bond's coupon or interest rate is below current market rates; investors will just consent to purchase the bond at a "discount" from its face value.

Since bond prices and interest rates are conversely related, as interest rates move after bond issuance, bond's will be supposed to exchange at a premium or a discount to their par or maturity values. On account of bond discounts, they ordinarily mirror an environment in which interest rates have increased since a bond's issuance. Since the bond's coupon or interest rate is presently below market rates, and investors can get better arrangements (and better yields) with new issues, those selling the bond need to, in effect, mark it down to make it more interesting to purchasers. So the bond will be priced at a discount to its par value.

Accounting for the Unamortized Bon Discount

The bond's issuer can continuously choose for discount the whole amount of a bond discount immediately, in the event that the amount is immaterial (e.g., substantially affects the financial statements of the issuer). Assuming this is the case, there is no unamortized bond discount, in light of the fact that the whole amount was amortized, or

written off, in one swallow. Generally, however, the amount is material, as is amortized over the life of the bond, which might span a number of years. In this last option case, there is almost consistently an unamortized bond discount on the off chance that bonds were sold below their face amounts, and the bonds have not yet been retired.

A bond's unamortized discount to par will:

1. transform into a recognized capital loss in the event that the bond is sold before its stated maturity; or,
2. shrink as the bond's market price ascends with the progression of time as the bond approaches its maturity date, which the bond will then be priced at its par value.

Unamoritzed Bond Premium

The flip side or an unamortized bond discount is a unamortized bond premium. A bond premium is a bond that is priced higher than its face value. Unamortized bond premium alludes to the amount between the face value and the higher amount the bond was sold at, minus the interest.The unamortized bond premium is the part of the overall bond premium that the issuer will amortize — that is, discount gradually against expenses from here on out. The amortized amount of this bond is credited as a interest expense.

Features

• The bond issuer amortizes — that is, discounts slowly — a bond discount over the excess term of the associated bond as an interest expense. The amount of the bond discount that has not yet been written off is the unamortized bond discount.
• The flip side or an unamortized bond discount is an unamortized bond premium, which becomes possibly the most important factor when the bond is selling for more than its face value.
• An unamortized bond discount addresses a difference between the face value of a bond and the amount really paid for it by investors — the proceeds harvested by the bond's issuer.