Discounts and premiums occur when the issuance price of a bond is more (premium) or less (discount) than its principal or face value. This result is due to a difference between the market or effective rate of interest and the coupon or face interest rate of the bond on the issuance date. If the market rate exceeds the coupon rate, the bond is issued at a discount, and if the market rate is less than the coupon rate, the bond is issued at a premium.
This paper presents an alternative approach for teaching the interest method amortization of bond premiums and discounts.
This article is from the Accounting Instructors’ Report, an electronic journal that provides teaching tips and insights to those who teach accounting and other business courses.
Stephen T. Scott, Associate Professor, School of Commerce, Northwestern Business College