What Is an Unamortized Bond Discount?
Let me explain what an unamortized bond discount really is—it's an accounting approach for specific bonds where you see the difference between the bond's par value, which is its value at maturity, and the actual proceeds from selling it, minus whatever portion has already been amortized on the profit and loss statement.
You need to grasp that this unamortized part is what's left after gradual write-offs.
Key Takeaways
- An unamortized bond discount shows the gap between a bond's face value and what investors actually paid for it.
- This discount is the proceeds the issuer receives from the bond sale.
- The issuer amortizes the discount over the bond's remaining term as an interest expense.
- Whatever hasn't been written off yet is the unamortized bond discount.
- On the flip side, there's the unamortized bond premium when the bond sells above face value.
How Unamortized Bond Discount Works
The discount itself is the difference between what it costs to buy the bond at market price and its par or face value. As the issuer, you can choose to expense the whole discount right away or treat it as an asset to amortize over time. Anything not yet expensed is your unamortized bond discount.
This happens when the bond's interest rate is lower than the market rate for similar risks. If the coupon rate is below market on sale day, investors will only buy it at a discount from face value.
Remember, bond prices and interest rates move inversely. After issuance, if rates rise, the bond trades at a discount to par because its rate is now below market, so sellers mark it down to attract buyers.
Accounting for the Unamortized Bond Discount
You, as the issuer, can write off the entire discount at once if it's immaterial and won't impact your financial statements much. In that case, there's no unamortized discount left since it's all expensed immediately.
But usually, it's material, so you amortize it over the bond's life, meaning there's almost always some unamortized discount if the bond sold below face and hasn't matured yet.
That unamortized discount will turn into a capital loss if you sell the bond early, or it will shrink as the market price rises toward par as maturity approaches.
Unamortized Bond Premium
Now, let's look at the opposite: an unamortized bond premium. This is when the bond sells for more than its face value. The unamortized part is the difference between face value and the higher sale price, minus what's already amortized.
You amortize this premium incrementally against expenses in the future, and the amortized amount gets credited as an interest expense.
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