Unamortized Bond Premium
Candlefocus EditorThe Unamortized Bond Premium is an equalizing effect when a bond is issued as an issuer may sell the bond at a higher price but make up the difference in paying a higher coupon rate. This ensures the bond is still priced below its par value, while still creating a shadow in the form of a liability. On the issuer's balance sheet, this Unamortized Bond Premium would be listed as a liability account, to be paid off at maturity.
Since the bond premium is recorded as a liability on the issuer’s balance sheet, the issuer must then amortize the bond premium to account for the interest expense incurred. To amortize means to spread the cost of an asset over its lifetime, which in this case means writing off the premium over the life of the bond. As the bond gets closer to its maturity date, the Unamortized Bond Premium on the issuer’s balance sheet will decrease as the issuer pays down the liability.
Unamortized Bond Premium can be beneficial for the issuer, as well as the investor, as this allows the issuer to issue a bond at a higher price but still pay out at the original face value when the bond matures. For the investor, this can help increase the return on their bond investments as they are now receiving a higher coupon rate due to the bond being sold at a premium.
Unamortized Bond Premium is an important concept for both bond issuers and investors to be aware of, as it can directly impact the return on bond investments. It is also important for bond issuers to understand how to properly amortize the premium in order to comply with accounting regulations and properly record the expense on their financial statements.