what is an amortized bond 
an amortized bond is one in which the principal face value on the debt is paid down regularly along with its interest expense over the life of the bond a fixed rate residential mortgage is one common example because the monthly payment remains constant over its life of say 30 years however each payment represents a slightly different percentage mix of interest versus principal an amortized bond is different from a balloon or bullet loan where there is a large portion of the principal that must be repaid only at its maturity understanding amortized bondsthe principal paid off over the life of an amortized loan or bond is divvied up according to an amortization schedule typically through calculating equal payments all along the way this means that in the early years of a loan the interest portion of the debt service will be larger than the principal portion as the loan matures however the portion of each payment that goes towards interest will become lesser and the payment to principal will be larger the calculations for an amortizing loan are similar to that of an annuity using the time value of money and can be carried out quickly using an amortization calculator amortization of debt affects two fundamental risks of bond investing first it greatly reduces the credit risk of the loan or bond because the principal of the loan is repaid over time rather than all at once upon maturity when the risk of default is the greatest second amortization reduces the duration of the bond lowering the debt s sensitivity to interest rate risk as compared with other non amortized debt with the same maturity and coupon rate this is because as time passes there are smaller interest payments so the weighted average maturity wam of the cash flows associated with the bond is lower example of amortizing a bond30 year fixed rate mortgages are amortized so that each monthly payment goes towards interest and principal say you purchase a home with a 400 000 30 year fixed rate mortgage with a 5 interest rate the monthly payment is 2 147 29 or 25 767 48 per year at the end of year one you have made 12 payments most of the payments have been towards interest and only 3 406 of the principal is paid off leaving a loan balance of 396 593 the next year the monthly payment amount remains the same but the principal paid grows to 6 075 now fast forward to year 29 when 24 566 almost all of the 25 767 48 annual payments will go towards principal free mortgage calculators or amortization calculators are easily found online to help with these calculations quickly straight line vs effective interest method of amortizationtreating a bond as an amortized asset is an accounting method used by companies that issue bonds it allows issuers to treat the bond discount as an asset over the life of the bond until its maturity date a bond is sold at a discount when a company sells it for less than its face value and sold at a premium when the price received is greater than face value if a bond is issued at a discount that is offered for sale below its par or face value the discount must be treated either as an expense or it can be amortized as an asset in this way an amortized bond is used specifically for tax purposes because the amortized bond discount is treated as part of a company s interest expense on its income statement the interest expense a non operating cost reduces a company s earnings before tax ebt and therefore the amount of its tax burden amortization is an accounting method that gradually and systematically reduces the cost value of a limited life intangible asset effective interest and straight line amortization are the two options for amortizing bond premiums or discounts the easiest way to account for an amortized bond is to use the straight line method of amortization under this method of accounting the bond discount that is amortized each year is equal over the life of the bond companies may also issue amortized bonds and use the effective interest method rather than assigning an equal amount of amortization for each period effective interest computes different amounts to be applied to interest expense during each period under this second type of accounting the bond discount amortized is based on the difference between the bond s interest income and its interest payable effective interest method requires a financial calculator or spreadsheet software to derive 