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    lgs's Avatar
    lgs Posts: 1, Reputation: 1
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    #1

    Aug 17, 2009, 10:00 PM
    bond premium amortization effective interest rate
    If I purchase a bond with a face value of 1000 for 1055 with stated interest of 5.7% payable semi annually and due in 7 years, how do I determine the effective interest rate for amortization purposes?
    morgaine300's Avatar
    morgaine300 Posts: 6,561, Reputation: 276
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    #2

    Aug 17, 2009, 10:28 PM

    The 1055 is your starting carrying value. Figure out the interest on the carrying value at the market rate that was used to come up with that premium amount. Then figure the interest on the face value at the stated rate. The difference between those two is the amortization. If you want to amortize semi-annually, don't forget to divide both of those in two.

    The amortization works towards face value. In this case, carrying value will go down towards face value. So adjust your carrying value down by that last amortization.

    With the new carrying value, repeat the process.
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