Understanding Bond Discount and Premium

🔍Bonds are sold at a discount when the market interest rate is higher than the stated rate, and at a premium when the market rate is lower than the stated rate.

📈The difference between the face value and the selling price of a bond is the discount or premium on bonds payable.

💰Discount on bonds payable is a prepaid interest by the issuer to bondholders, while premium on bonds payable is an additional interest paid by bondholders to the issuer upfront.

⏰The amortization process for discounts and premiums involves dividing the total discount or premium by the life of the bonds and allocating it over the bond's term.

💡The straight-line method is commonly used to amortize discounts and premiums, where the amortization amount is equal for each period.

Why are bonds sold at a discount or premium?

—Bonds are sold at a discount when the market interest rate is higher than the stated rate, making them less attractive to investors. On the other hand, bonds are sold at a premium when the market rate is lower than the stated rate, making them more attractive.

What is the difference between discount and premium on bonds payable?

—Discount on bonds payable is the interest prepaid by the bond issuer to the bondholders, while premium on bonds payable is an additional interest paid by bondholders to the issuer upfront.

How is the discount or premium on bonds payable amortized?

—The discount or premium on bonds payable is amortized by dividing the total discount or premium by the life of the bonds and allocating it over the bond's term using methods such as the straight-line method.

What is the straight-line method of amortization?

—The straight-line method of amortization is a common method used to allocate the discount or premium on bonds payable equally over the term of the bonds. It ensures a consistent amortization amount for each period.

Are all bonds sold at a discount or premium?

—No, not all bonds are sold at a discount or premium. Bonds are sold at face value when the stated rate of interest is equal to the market rate, resulting in no discount or premium.

00:00The video introduces the concepts of bond discount and premium.

01:10The difference between the face value and the selling price of a bond is the discount or premium on bonds payable.

01:59Discount on bonds payable is a prepaid interest by the issuer to bondholders.

03:11The amortization process for discounts and premiums involves dividing the total discount or premium by the life of the bonds.

04:25The straight-line method is commonly used to amortize discounts and premiums.

05:16Bonds are sold at a discount when the market interest rate is higher than the stated rate.

06:02Bonds are sold at a premium when the market rate is lower than the stated rate.