Amortizable Bond Premium

Amortizable bond premium is an accounting terms that defines the tax related to the excessive premium that is paid by the business entity over the face value of a given bond. The tax traits of the bond depends upon its type as there are a number of bonds of various types where the premium issued on the bond is tax deductible in nature and is amortized over the life span of the bonds. This amortization is done on pro-rate basis. As we all know that premium on the bonds occur in a situation where the price of the bond is increased in the secondary market due to a fall in the current market interest rate.

A number of individuals and other business entities invest in taxable premium bonds. However the question arises how they get benefit from these taxable premium bonds. The answer is simple they get benefit from the amortizing premium accumulating on the bonds. The amount of amortized premium can be used by the bond owner to offset the accumulated interest on the bond. By using amortized premium as a source to pay interest will result in reducing the amount of the tax that a bond holder has to regarding the bonds. The cost of the bond is also reduced by the amount of the premium that is amortized each year throughout the entire life span of the bond.

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