An unamortized bond discount is an accounting methodology for certain bonds. The unamortized bond discount is the difference between the par of a bond — the value of the bond at maturity — and the proceeds from the sale of the bond by the issuing company, less the portion that has already been amortized on the profit and loss statement.
Breaking Down Unamortized Bond Discount
The discount refers to the difference in the cost to purchase a bond (it's market price) and its par, or face value. The issuing company can choose to expense the entire amount of the discount or can handle the discount as an asset to be amortized. Any amount that has yet to be expensed is referred to as the unamortized bond discount.
A bond discount to par value occurs when the current interest rate associated with a bond is lower than the market interest rate of issues of similar credit risk. If on the date a bond is sold, the listed bond's coupon or interest rate is below current market rates; investors will only agree to purchase the bond at a "discount" from its face value.
Because bond prices and interest rates are inversely related, as interest rates move after bond issuance, bond's will be said to be trading at a premium or a discount to their par or maturity values. In the case of bond discounts, interest rates will have risen since a bond's issuance. Because a bond's coupon or interest rate is below market rates, they will only be priced at a discount to their par value.
A bond's unamortized discount to par will: (1) turn into a recognized capital loss if the bond is sold before its stated maturity; or, (2) shrink as the bond's market price rises with the passage of time as the bond nears its maturity date, which the bond will then be priced at its par value.