A bond issued away from face value doesn’t just sit there — its carrying value gradually moves toward face value each period as the premium or discount amortizes.
How it works
Applying the market rate at issuance to the current carrying value gives interest expense; comparing that against the cash coupon payment (face value times the stated rate) gives the amortization amount, which adjusts the carrying value for the next period.
What this does not include
This does not include a full multi-period amortization schedule — this calculator computes one period at a time; running it again with the new carrying value as the starting point walks through the schedule period by period.
How to use this calculator
- Enter the current carrying value, face value, coupon rate, and market rate at issuance.
Frequently asked questions
Why is interest expense different from the cash coupon payment?
Interest expense reflects the bond’s actual market yield at issuance applied to its carrying value, while the cash coupon is a fixed dollar amount based on the stated rate — the two only match exactly when a bond is issued at face value.
What happens to the amortization amount as a bond approaches maturity?
It shrinks toward zero as carrying value converges on face value, so that by maturity the carrying value exactly equals the face value being repaid.
Is the effective interest method required under GAAP?
Yes — it’s the required method under U.S. GAAP for material bond premiums and discounts, having replaced the simpler (but less accurate) straight-line amortization method for most purposes.
