Amortizable Bond Premium

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DEFINITION of 'Amortizable Bond Premium'

A tax term referring to the excess premium paid over and above the face value of a bond. Depending on the type of bond, the premium can be tax deductible and amortized over the life of the bond on a pro-rata basis.

A bond premium occurs when the price of the bond has increased in the secondary market due to a drop in market interest rates.

BREAKING DOWN 'Amortizable Bond Premium'

Those who invest in taxable premium bonds typically benefit from amortizing the premium, because the amount amortized can be used to offset the interest from the bond, which will reduce the amount of taxable income the investor will have to pay with respect to the bond. The cost basis of the taxable bond is reduced by the amount of premium amortized each year.

There is no deduction possible for bond premiums that are already considered tax-free bonds.

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