Smart Bond Premium Dealing

It’s called a bond premium, an implicit in your purchase price when you buy a bond that gave you an interest rate above the prevailing market interest rate. The bond premium is simply the market’s approach of regulating the price of a bond that gives you too high interest rate.

Some people treat bond premium too hassle for record keeping. But, basically, what you must do is simply amortize the bond premium amount over bond life span. In consequence, this premium management lets you cut into manageable pieces of the premium amount and apportion it over the period of time that the bond gives its interest, thus decreasing the bond interest. For instance, if you pay $100 of bond premium for a bond that will give you an interest over 10 years time, it would be treat to decrease the bond amount of interest by $10 a year in record. The $10 amount is tantamount to one-tenth of one hundred dollars bond premium. This explanation is just the light tone because the actual computations are too complex and out of scope of this post.

Just remember to use an effective interest rate for the annual bond interest adjustment to a certain amount that the interest rate remains equal to the bond’s yield to maturity.

Due to the complexity, it’s suggested to ignore the bond premium. By disregarding the bond premium you will overstate the interest you will get through the years that you keep holding the bond. It means that you will pay more income taxes on the bond interest through the years. This kind of technique of ignoring the bond premium until the end and then considering the bond premium as loss, or an adjustment on the bond interest paid in the last year, provides your record keeping more simple and easy.

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