Unamortized Bond Discount
Candlefocus EditorIn order to manage the conflicting interests of bond issuers and bondholders, governments and regulatory bodies have put in place regulations to amortize the bond discount over the life of the bond. Amortization of the bond discount means that the difference between the purchase price and the face value of the bond is gradually reduced over time, with the reduction recognized as an interest expense for the issuing company.
At any given point in the bond’s life, the amount of the unamortized bond discount represents the amount of the discount which has not yet been written off. This figure is important as it affects the accounting value of the bond, which is the amount that is shown on a company’s balance sheet and forms the basis for calculating the company’s taxable income. The unamortized bond discount also has an impact on the bondholders as it affects how much money they will receive when the bond matures.
The bondholder could adjust the amortization of the discount to maximize it while the issuer could adjust it to minimize it, but the adjustments have to be within the regulations and the regulations differ from one country to another. The unamortized bond discount should be taken into consideration by investors when evaluating the risk and return of a bond before making an investment decision. Unamortized bond discount is important information for investors and bond issuers alike, thus investors should always ask for a detailed breakdown of the amortization schedule of a bond before investing.