Unamortized bond premium definition
/What is an Unamortized Bond Premium?
An unamortized bond premium is the difference between the price at which a bond was sold and its face value. It is classified as a liability of the bond issuer, since it represents interest that has not yet been paid to bondholders.
The unamortized bond premium account contains the remaining amount of bond premium that the bond issuer has not yet charged off to interest expense over the life of the bond. The balance in this account will gradually decline over the remaining life of the bond, as the issuer gradually amortizes the premium.
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Example of an Unamortized Bond Premium
A company issues bonds with a face value of $100,000. The bonds are sold at $105,000 (i.e., at a $5,000 premium). The bond term is 5 years, and the company uses straight-line amortization. The calculation of its unamortized bond premium is as follows:
Total Bond Premium:
$105,000 (issue price) – $100,000 (face value) = $5,000 premiumAnnual Amortization:
$5,000 ÷ 5 years = $1,000 per yearAfter 2 Years:
$1,000 × 2 = $2,000 amortizedUnamortized Bond Premium (after 2 years):
$5,000 – $2,000 = $3,000
After 2 years, the unamortized bond premium is $3,000, which remains on the books and will continue to be amortized over the remaining 3 years.