Amortizable Bond Premium

AAA

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.

INVESTOPEDIA EXPLAINS '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 related to tax-free bonds.

RELATED TERMS
  1. Amortization

    1. The paying off of debt in regular installments over a period ...
  2. Unamortized Bond Premium

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

    A description of the bond premium when the bond market value ...
  4. Cost Basis

    1. The original value of an asset for tax purposes (usually the ...
  5. Deduction

    Any item or expenditure subtracted from gross income to reduce ...
  6. Premium Bond

    1) A bond that is trading above its par value. A bond will trade ...
Related Articles
  1. Understanding Bond Prices and Yields
    Bonds & Fixed Income

    Understanding Bond Prices and Yields

  2. How Bond Market Pricing Works
    Bonds & Fixed Income

    How Bond Market Pricing Works

  3. What is the difference between amortization ...
    Investing

    What is the difference between amortization ...

  4. Advanced Bond Concepts
    Bonds & Fixed Income

    Advanced Bond Concepts

Hot Definitions
  1. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  2. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  3. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  4. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  5. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  6. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
Trading Center