The carrying value of a bond refers to the amount of the bond’s face value plus any unamortized premiums or less any unamortized discounts. The carrying value is also commonly referred to as the carrying amount or the book value of the bond.
Since interest rates continually fluctuate, bonds are rarely sold at their face values. Instead, they sell at a premium or at a discount to par value, depending on the difference between current interest rates and the stated interest rate for the bond on the issue date. Premiums and discounts are amortized over the life of the bond. Therefore, book value equals par value at maturity.
- The carrying value of a bond is the bond’s face value plus any unamortized premiums or less any unamortized discounts.
- A carrying value is carried on the balance sheet of a company's financial statements.
- Because interest rates continually fluctuate, bonds sold after their issue dates typically sell at a premium or discount to par value.
- To calculate carrying value using the effective interest rate method, one must first determine the bond’s par value, interest rate, and time to maturity.
- Essentially, the carrying value represents the money owed to bondholders.
Calculating the Carrying Value of a Bond
The first step in calculating carrying value requires determining the terms of the bond. For instance, using the effective interest rate method, the following three bond characteristics must be isolated:
- The bond’s par value
- The bond's interest rate
- The bond's time to maturity
After locking in these values, one must determine if a bond is sold at face value, at a premium or at a discount.
A bond with an interest rate equal to current market rates sells at par. If current market rates are lower than an outstanding bond's interest rate, the bond will sell at a premium. If current market rates are higher than an outstanding bond's interest rate, the bond will sell at a discount.
You must also determine the amount of time that has passed since the bond’s issuance plus how much of the premium or discount has amortized. Typically, amortization is calculated on a straight-line basis. That is, the same amount is amortized for each reported period.
Once you've gathering this information, you can use a carrying value calculator such as a bond price calculator to determine the carrying value of the bond.
In the next section, you'll see an example of the calculation using the straight-line amortization method. Ultimately, the unamortized portion of the bond's discount or premium is either subtracted from or added to the bond's face value to arrive at carrying value.
Credit Rating Agencies
Bond issuers and the specific bond instruments they offer are rated by credit rating agencies such as Moody's Investors Service and Standard & Poor's. Bond issuers who receive higher credit ratings are far likelier to fetch higher prices for their bonds than similar, lower-rated issuers.
Example of Calculating the Carrying Value of a Bond
Say company XYZ issued bonds with a face value of $1,000 and a term of five years. They sold at a premium of $1,100. Assume a year has passed since the bond was issued. Here's how to calculate the carrying value using the straight-line method,
Start by determining the unamortized amount:
Premium over face value/term = amortized amount per year
$100/5 years = $20
$20 per year x 1 year (of the 5-year term that has passed) = $20
$100 - $20 = $80 (the amount of the premium that remains unamortized).
Next, determine the carrying value:
Carrying value = Face value + unamortized premium
Carrying value = $1000 + $80
Carrying value = $1080
The carrying value at this point in time is $1080.
How Is a Bond's Carrying Value Recorded?
The information relating to carrying value is reported via various accounts on a company's balance sheet. That is, face value is recorded as a credit balance in the Bonds Payable account. Unamortized premium is recorded as a credit balance in the Premium on Bonds Payable liability account. Unamortized discount is recorded as a debit balance in the Discount on Bonds Payable contra-liability account. The current value is recorded as a long-term liability.
What Is the Carrying Value of a Bond?
It's the amount carried on a company's balance sheet that represents the face value of a bond plus any unamortized premium or less any unamortized discount. It's essentially the amount owed by the bond issuer to the bondholder.
What Is the Difference Between Carrying Value and Book Value?
There's no difference. Carrying value is often referred to by the terms book value and carrying amount.
What Is the Carrying Value of Goodwill?
Goodwill is an intangible asset. It's a monetary figure reflected by the amount paid in addition to the fair market value of a company when that company is purchased. Goodwill usually isn't amortized (except by private companies in some circumstances) because its useful life is indeterminate. However, impairment to the book value of goodwill is measured as fair value dips below book value.
The Bottom Line
The carrying value of a bond is the sum of its face value plus unamortized premium or the difference in its face value less unamortized discount. It can be calculated in various ways such as the effective interest rate method or the straight-line amortization method. It's carried on a company's balance sheet.
Also known as book value, the carrying value of a bond represents the actual amount that a company owes the bondholder at any given time.