How to Calculate the Carrying Value of a Bond
Original post by Adam Parker of Demand Media
When the market interest rate differs from the coupon of a newly issued bond, this affects the price at which the bond is issued. This price change brings the effective interest rate of the bond in line with the market. Carrying value is a concept used to account for the price difference that arises in this situation.
Identify the par value of the bond. This is also called the face value and it is the value on which the coupon based. For example, a bond with a face value of $1,000 and a 5 percent coupon pays $50 a year. While the nominal interest payment is fixed, the bond price and yield are subject to change.
Determine whether the bond sold at a premium or a discount. If the bond sells for more than par value, it is said to sell for a premium. If the bond sells for less than par value, it is said to sell at a discount. The reason bonds often sell for a premium or a discount is because of interest rate disparities. If a bond with a 5 percent coupon is issued during a time when the market rate is 4 percent, the bond will sell at a premium because the coupon offers higher interest than the current market rate. This situation is reversed when the bond coupon is lower than the market rate.
Add the unamortized premium or subtract the unamortized discount. Amortization is the practice of spreading out the price difference between the actual price of the bond and the par value over the life of the bond. Therefore, the unamortized premium or discount is the total difference existing between the real value and par value of the bond at any given time. For example, consider the $1,000 bond with the 5 percent coupon issued into a 4 percent market. The coupon is higher than the market interest rate, so the bond is issued at a premium of $1,250. Two years pass and $100 of the premium is amortized. Therefore, the carrying value of the bond is $1,000 plus $150 or $1,150.
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About the Author
Adam Parker is a writer from Virginia. He holds a Bachelor of Science from James Madison University. Parker has written articles for online sources including The Motley Fool, Gameworld Network and Glossy News.