What is Bond discount and premium?
In short
A bond is issued at a discount when its stated rate is below the market rate, and at a premium when its stated rate is above it. The discount or premium is amortized over the bond's life so its carrying amount reaches face value at maturity.
Key takeaways
- A discount increases interest expense above the cash paid; a premium reduces it.
- The issue price is the present value of the principal and interest at the market rate.
- Under the effective interest method, interest expense = carrying amount × market rate.
Where it's tested
FAR: Long-Term Debt (Bonds & Notes) — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
When bonds are issued at a premium, over the life of the bonds the carrying value and interest expense will: