Amortization is an accounting method that gradually and systematically reduces the cost value of a limited-life, intangible asset. Effective-interest and straight-line amortization are the two options for amortizing bond premiums or discounts. The easiest way to account for an amortized bond is to use the straight-line method of amortization.
What is a bond amortization schedule?
An amortization schedule is used to compute the percentage that is interest and the percentage that is principal within each bond payment. Two accounting methods are used for amortizing bond premiums and discounts: straight-line and effective-interest. Amortization of debt affects two fundamental risks of bond investing.
How does an amortized bond work?
The bond’s principal is divided up according to the security’s amortization schedule and paid off incrementally (often in one-month increments). An amortized bond is a bond with a face value (or par) and interest that is paid down gradually until the bond reaches maturity; bond maturity may range up to 30 years.
