The carrying value of a bond refers to the net amount between the bond’s face value plus any un-amortized premiums or minus any amortized discounts. The carrying value is also commonly referred to as the carrying amount or the book value of the bond.
Because 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 refers to the the net amount between the bond’s face, less any amortized discounts, or plus any un-amortized premiums.
- Because interest rates continually fluctuate--even on a daily basis, bonds are seldom sold at their face values. Rather, they sell at a premium or discount to par value, depending on the difference between current interest rates and the stated interest rate for the bond on the issue date.
- To calculate the carrying value, one must first determine the bond’s par value, its interest rate, and its time to maturity.
Calculating Carrying Value
The first step in calculating carrying value requires determining the terms of the bond. 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 a bond's interest rate is above current market rates, the bond consequently sells at a premium. If the interest rate of the bond is lower than the current market rate, it sells at a discount. The amount of time that has passed since the bond’s issuance must also be determined, as any premium or discount has to be amortized over the life of the bond.
It is essential to know how much of the premium or discount has amortized, in order accurately calculate the carrying value. Typically, amortization is on a straight-line basis; for each reported period, the same amount is amortized.
Calculating the carrying value of the bond, after gathering the aforementioned information, involves a simple arithmetic step of either addition or subtraction. The un-amortized 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.
[Important: 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 achieve higher credit ratings from these agencies are far likelier to fetch higher prices for their bonds than similar lower-rated issuers.]