In simple terms, it means slowly writing off the initial cost of an asset or a loan. Amortization can also refer to intangible assets, which means how much expenses that particular intangible asset would incur over the total life of an asset.

What is an Amortized Bond?

An amortized bond is one in which the principal amount (face value) on the debt is paid down regularly, along with its interest expense over the life of the bond.

Simply put, it is a type of bond where payment goes towards both interest and principal.

It is similar to EMI being paid on a loan.

Amortization is basically an accounting technique that favors the issuer when it comes to filing taxes. An amortized bond’s discount is considered as the portion of interest expense incurred on the income statement which turns out to be a cost from the company perspective that helps a business to cut down on its earnings before tax expense.

Amortization is carried out by two methods:

Straight-line method- This method equals the amortization of the bond value throughout the life of the bond.

Effective-interest method- This method calculates the different amortization amount that is applied to each interest payment per calculation period.

However, the amortized bond differs from a bullet bond wherein the bullet bond has its principal amount to be repaid only at its maturity.