How to calculate the carrying value of a bond
/What is a Bond?
A bond is a fixed obligation to pay that is issued by a corporation or government entity to investors. Bonds are used to raise cash for operational or infrastructure projects. Bonds usually include a periodic coupon payment, and are paid off as of a specific maturity date. There are a number of additional features that a bond may have, such as being convertible into the stock of the issuer, or callable prior to its maturity date.
What is the Carrying Value of a Bond?
The carrying value of a bond is that amount stated on the issuing entity's balance sheet. This amount will change over time, as the issuing entity records periodic amortizations of any discount or premium associated with the bond. Once the maturity date of a bond is reached, there will be no remaining discounts or premiums to amortize, so the face amount of the bond will then match its carrying value.
How to Calculate the Carrying Value of a Bond
Carrying value is the combined total of a bond’s face value and any unamortized discounts or premiums. A discount from the face value of a bond occurs when investors want to earn a higher rate of interest than the rate paid by the bond, so they pay less than the face value of the bond. Conversely, a premium on the face value of a bond occurs when the interest rate paid by a bond is higher than the market rate, so investors are willing to pay more than the face value. There is nearly always a discount or premium associated with a bond, since interest rates are continually fluctuating. These discounts are gradually amortized over the life of the bond, so that by the maturity date of a bond, its face value equals its carrying value.
When there is a discount from the face value of a bond, the remaining unamortized discount is subtracted from the face value to arrive at the carrying value. When there is a premium on the carrying amount, the remaining unamortized premium is added to the face value of the bond to arrive at the carrying value.
Impact of Credit Ratings on Bond Value
When a credit rating agency assigns a high rating to a bond issuer or specific instruments that it has issued, this typically results in a higher market price for the bond instruments in comparison to lower-rated bonds. This means that a higher-priced bond is more likely to have a premium associated with it.
Terms Similar to the Carrying Value of a Bond
The carrying value of a bond is also known as its book value.