- What is Bond premium?
- Is Bond premium an asset?
- What is the effect of amortizing a bond premium?
- What happens to the balance of the premium account associated with a bond over time?
- How is bond premium treated on tax return?
- Where does bond premium on tax exempt bonds go on the tax return?
- How do you calculate bond premium?
- Why would anyone buy a premium bond?
- Which is better discount bond or premium bond?
- What kind of account is a bond premium?
- How do you amortize premium bonds?
- Is a bond premium a debit or credit?
What is Bond premium?
A premium bond is a bond trading above its face value or costs more than the face amount on the bond.
A bond might trade at a premium because its interest rate is higher than the current market interest rates.
The company’s credit rating and the bond’s credit rating can also push the bond’s price higher..
Is Bond premium an asset?
Premium on bonds payable is the excess amount by which bonds are issued over their face value. This is classified as a liability, and is amortized to interest expense over the remaining life of the bonds. … In this case, investors are willing to pay extra for the bond, which creates a premium.
What is the effect of amortizing a bond premium?
What is the effect of amortizing a bond premium? Its effect on the carrying value of bonds cannot be determined without knowing the maturity date of the bond. It does not affect the carrying value of the bonds. It increases the carrying value of the bonds.
What happens to the balance of the premium account associated with a bond over time?
The unamortized discount on bonds payable will have a debit balance and that decreases the carrying amount (or book value) of the bonds payable. The premium or discount is to be amortized to interest expense over the life of the bonds. Hence, the balance in the premium or discount account is the unamortized balance.
How is bond premium treated on tax return?
If the bond is a tax-exempt municipal, you report the loss of premium value and subtract the loss from the cost basis of the bond, but you don’t subtract it from your taxable income. Tax-exempt bonds purchased for a price above par must be amortized.
Where does bond premium on tax exempt bonds go on the tax return?
However, if you acquired a tax-exempt bond at a premium, only report the net amount of tax-exempt interest on line 2a of your Form 1040 or 1040-SR (that is, the excess of the tax-exempt interest received during the year over the amortized bond premium for the year).
How do you calculate bond premium?
The total bond premium is equal to the market value of the bond less the face value. For instance, with a 10-year bond paying 6% interest that has a $1,000 face value and currently costs $1,080 in the market, the bond premium is the $80 difference between the two figures.
Why would anyone buy a premium bond?
A person would buy a bond at a premium (pay more than its maturity value) because the bond’s stated interest rate (and therefore its interest payments) are greater than those expected by the current bond market. It is also possible that a bond investor will have no choice.
Which is better discount bond or premium bond?
So, a premium bond has a coupon rate higher than the prevailing interest rate for that particular bond maturity and credit quality. A discount bond by contrast, has a coupon rate lower than the prevailing interest rate for that particular bond maturity and credit quality.
What kind of account is a bond premium?
An unamortized bond premium is a liability for issuers as they have not yet written off this interest expense, but will eventually come due. On financial statements, unamortized bond premium is recorded in a liability account called the Unamortized Bond Premium Account.
How do you amortize premium bonds?
First, calculate the bond premium by subtracting the face value of the bond from what you paid for it. Then, figure out how many months are left before the bond matures and divide the bond premium by the number of months remaining. That tells you how much to amortize on a monthly basis.
Is a bond premium a debit or credit?
The entry to record the issuance of the bonds increases (debits) cash for the $11,246 received, increases (credits) bonds payable for the $10,000 maturity amount, and increases (credits) premium on bonds payable for $1,246.