Explore commonly used personal finance terms.
Amortization of premium refers to the process of gradually reducing the premium paid for a bond above its face value over its maturity period. This process adjusts the bond’s cost basis down to its par value, reducing taxable income for the investor. For tax purposes, bondholders must amortize the premium, especially on tax-exempt bonds, to ensure that interest income is reported accurately. This adjustment affects yield calculations and is essential for accurately reflecting the bond’s cost on financial statements.
