| DEFINITION: An Amortizable Bond Premium refers to the portion of the bond premium that you can write off over the life of the bond. |
Amortizable Bond Premium Explained
When it comes to investing in bonds, it’s not always as straightforward as buying at face value. Sometimes, you end up paying more than the face value of the bond, creating what’s known as a Bond Premium.
Now, this premium isn’t just a one-time cost; it actually has ongoing implications for your investment. Specifically, you’ll need to deal with an Amortizable Bond Premium, which refers to the portion of the bond premium that you can write off over the life of the bond.
In simpler terms, amortizing the bond premium means gradually reducing it from your taxable income over the bond’s life.
This is done because the premium is considered part of your overall investment in the bond.
Hence, as the bond approaches maturity, the premium is “written off,” affecting both the yield and the taxable income you’ll report.
Key Insights
- ADS opens doors for average investors to access global markets, which were previously only available to large institutions or sophisticated investors.
- Investing through ADS typically involves lower transaction costs than buying shares directly from foreign exchanges.
- Because ADSs are U.S.-traded, they comply with U.S. reporting and auditing standards, providing an additional layer of security for investors.
An Example Of Amortizable Bond Premium
Let’s say you purchase a 10-year bond with a face value of $1,000 for $1,100. The extra $100 is your bond premium.
Over the 10-year period, you can amortize this $100. If you amortize it equally each year, you’d reduce your taxable income by $10 annually.
FAQs
Is amortizing a bond premium mandatory?
For taxable bonds, it’s generally optional. For municipal bonds, the IRS often requires it.
How is the amortization calculated?
It usually follows a straight-line method, but some use the effective interest rate method.
Can I amortize a bond premium on a tax-free bond?
Yes, but it will reduce the tax-free interest you earn over the bond’s life.