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Carrying Value of Bond

Updated on January 5, 2024
Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

What is the Carrying Value of Bond?

Carrying value of a bond is also known as book value or carrying amount of bond and it is nothing but the sum total of the face value and unamortized premiums (if any) less unamortized discounts (if any) of a bond and this amount is usually projected on the issuing company’s balance sheet.

It’s known that bond pricesBond PricesThe bond pricing formula calculates the present value of the probable future cash flows, which include coupon payments and the par value, which is the redemption amount at maturity. The yield to maturity (YTM) refers to the rate of interest used to discount future cash flows.read more are volatile since they fluctuate daily. As the price is not constant, it causes the bond to be traded at a premium or discount according to the difference between the market rate of interest and stated bond interest on the date of issuance. These premiums or discounts are amortized over the life of the bond, thereby making the value of the bond equal to the face value on maturity.

Carrying Value of Bond

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Key Takeaways

  • . The bond’s carrying value, also known as the book value or the net carrying amount, represents the amount at which the bond is recorded on the issuer’s balance sheet.
  • The carrying value of a bond can be different from its face value, which is the amount stated on the bond certificate.
  • If a bond is issued at a discount (below face value) or a premium (above face value), the difference is amortized over the bond’s remaining life.
  • The carrying value of a bond can impact the financial reporting and analysis of both the issuer and the investor. For the issuer, it affects the balance sheet presentation and the interest expense calculation
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How to Calculate the Carrying Value of Bond?

The effective interest methodThe Effective Interest MethodEffective interest method is used for allocating interest expense over the life of financial instruments with the help of standard rate and the market rate of a financial instrument with the aim of reaching to the par value of instrument which is sold either at discount or premium by accumulating and amortizing interest expenditure to carrying value of the financial instrument on systematic and consistent basis respectively.read more is one of the most common ways for amortizing premiums and discounts and perhaps one of the easiest methods for computation of carrying value.

For simplicity, let’s assume a firm issuing a 3 year bond with a face value of $100,000 has an annual coupon rate of 8%. The investors view the firm as having considerable risk and are willing to purchase the bond only if it offers a higher yield of 10%.

Since the YTM (yield to maturityYield To MaturityThe yield to maturity refers to the expected returns an investor anticipates after keeping the bond intact till the maturity date. In other words, a bond's returns are scheduled after making all the payments on time throughout the life of a bond. Unlike current yield, which measures the present value of the bond, the yield to maturity measures the value of the bond at the end of the term of a bond.read more) of 10% is higher than the coupon rate (8%), the bond shall be sold at a discount. Thus, its carrying value shall be less than its face value of $100,000.

Let us consider another below example with a Bond Amortization schedule for a bond Par value of $600,000 for improved understanding:

Number of PaymentsPayment DateAmount of Payment [A]Bond Interest Expense [B]Discount Amortized [C]Unamortized Discount [D] CarryingValue of Bond [E]
0Jan 1, 20132,03,408.033,96,591.97
1Jan 1, 201336,00047,591.04-11,591.041,91,816.994,08,183.01
2Jan 1, 201436,00048,981.96-12,981.961,78,835.034,21,164.97
3Jan 1, 201436,00050,539.80-14,539.801,64,295.244,35,704.76
4Jan 1, 201536,00052,284.57-16,284.571,48,010.674,51,989.33
5Jan 1, 201536,00054,238.72-18,238.721,29,771.954,70,228.05
6Jan 1, 201636,00056,427.37-20,427.371,09,344.584,90,655.42
7Jan 1, 201636,00058,878.65-22,979.6586,465.935,13,534.07
8Jan 1, 201736,00061,624.09-25,624.0960,841.845,39,158.16
9Jan 1, 201736,00064,698.98-28.698.9832,142.865,67,857.14
10Jan 1, 201836,00068,142.86-32,142.8606,00,000.00
Total3,60,0005,63,408.03-2,03,408.03

Below is the basis of calculations:

  • A = $600,000 * 0.06
  • B= E * 0.12
  • C = A – B
  • D = Prior payment unamortized discount minus current discount amortized
  • E = Prior carrying balance minus current discount amortized

Whenever there is an issuance of a bond, a premium or discount account is created, which consists of the difference between the face value of the bond and the cash collected through the sale of the bond. While recording them in the financial statementsThe Financial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more, the bond premium or discount is netted with bonds payable for computing the carrying value of the bond.

The carrying value/book value of a bond is the actual amount of money an issuer owes the bondholderBondholderA bondholder is an investor who buys or holds a government or corporate bond.read more at a given point in time. This is the par value of the bond less any remaining discounts or including any remaining premiums.

Recording Carrying Value of Bond on Financial Statements

The carrying value or book value of bonds payable includes the following amounts, all of which are found in bond-related liability accounts:

One should note that the discount, premium, and issue costs are amortized properly up to the moment when the book value of the bonds is needed.

Certain structured bonds can have a redemption amount different from the face value and can also be linked to the performance of assets such as FOREX, commodity index, etc. This may result in the investor receiving more or less than its original value on maturityValue On MaturityMaturity value is the amount to be received on the due date or on the maturity of instrument/security that the investor holds over time. It is calculated by multiplying the principal amount to the compounding interest, further calculated by one plus rate of interest to the period's power.read more.

Frequently Asked Questions (FAQs)

Does the carrying value of a bond change over time?

The carrying value of a bond may change over time due to the amortization of premiums or discounts, as well as the accrual and payment of interest. Changes in market conditions and the bond’s remaining term can also impact the carrying value.

How does the carrying value relate to the amortization of premiums or discounts?

When a bond is issued at a premium or discount, the premium or discount is typically amortized over the bond’s remaining term. Therefore, this means that a portion of the premium or discount is gradually recognized as interest expense or income over time, which affects the bond’s carrying value.

Can the carrying value of a bond be more significant than its face value?

Yes, the carrying value of a bond can be greater than its face value if the bond is issued at a premium. A premium occurs when the bond’s coupon rate exceeds the prevailing market interest rate. The bonus is amortized over time, resulting in a higher carrying value than the bond’s face value.

This has been a guide to the Carrying Value of Bond. Here we discuss how to amortize premiums/discounts and calculate the Carrying Value of Bond and also how to record it on financial statements. You can learn more from the following articles –

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