Amortizable Bond Premium

What is an 'Amortizable Bond Premium'

Amortizable bond premium is 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.

RELATED TERMS
  1. Premium Bond

    1) A bond that is trading above its par value. A bond will trade ...
  2. Unamortized Bond Premium

    The difference between the par-value or face-value of a bond ...
  3. Amortized Bond

    A financial certificate that has been reduced in value for records ...
  4. Bond

    A debt investment in which an investor loans money to an entity ...
  5. Discount Bond

    A bond that is issued for less than its par (or face) value, ...
  6. Effective Interest Method

    The practice of accounting for the discount at which a bond is ...
Related Articles
  1. Investing

    What is a Premium Bond?

    A premium bond is one that trades above its face or nominal amount.
  2. Personal Finance

    Taxation Rules For Bond Investors

    Several factors affect the taxable interest that must be reported. Learn more here.
  3. Markets

    Are Bonds Selling At A Premium A Good Investment?

    A bond with a par value – or face value -- of $1,000 is selling at a premium when its price exceeds par.
  4. Personal Finance

    How To Choose The Right Bond For You

    Bond investing is a stable and low-risk way to diversify a portfolio. However, knowing which types of bonds are right for you is not always easy.
  5. Markets

    5 Fixed Income Plays After the Fed Rate Increase

    Learn about various ways that you can adjust a fixed income investment portfolio to mitigate the potential negative effect of rising interest rates.
  6. Trading

    Top 6 Uses For Bonds

    We break down the stodgy stereotype to see what these investments can do for you.
  7. Managing Wealth

    5 Reasons to Invest in Municipal Bonds When the Fed Hikes Rates

    Discover five reasons why investing in municipal bonds after the Fed hikes interest rates, and not before, can be a great way to boost investment income.
  8. Managing Wealth

    How To Evaluate Bond Performance

    Learn about how investors should evaluate bond performance. See how the maturity of a bond can impact its exposure to interest rate risk.
  9. Retirement

    Should I Invest in Bonds After I Retire?

    Yes, retirees should invest in bonds, but remember that not all bonds are safe investments. Seek the help of a financial advisor.
  10. ETFs & Mutual Funds

    Why Muni Bonds and Bond Funds are Perfect Together

    Municipal bonds and bond funds differ in several ways, which is partly why they complement each other well.
RELATED FAQS
  1. How can I calculate the carrying value of a bond?

    Learn what the carrying value of a bond means, how it can change and the easiest way to calculate a bond's carrying value ... Read Answer >>
  2. What does it mean when a bond is selling at a premium? Is it a good investment?

    When the terms premium and discount are used in reference to bonds, they are telling investors that the purchase price of ... Read Answer >>
  3. What determines the price of a bond in the open market?

    Learn more about some of the factors that influence the valuation of bonds on the open market, and why bond prices and yields ... Read Answer >>
  4. What happens to the price of a premium bond as it approaches maturity?

    Learn how bonds trade in regard to premiums and discounts, and how bond prices shift closer to par value as bonds approach ... Read Answer >>
  5. What are the key factors that will cause a bond to trade as a premium bond?

    Learn about the primary factor that can cause bonds to trade at a premium, including how national interest rates affect bond ... Read Answer >>
  6. Will the price of a premium bond be higher or lower than its par value?

    Find out why the selling price of a premium bond is always higher than its par value, including how changing interest rates ... Read Answer >>
Hot Definitions
  1. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  2. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  3. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  4. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  5. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  6. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
Trading Center