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Effective Interest Amortization of Bond Premium or Discount definitions

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  • Effective Interest Method
    A technique allocating bond premium or discount based on carrying value and market rate, resulting in changing interest expense each period.
  • Bond Premium
    The excess of a bond's selling price over its face value, occurring when the stated rate exceeds the market rate.
  • Bond Discount
    The amount by which a bond's selling price is less than its face value, arising when the stated rate is below the market rate.
  • Stated Rate
    The interest rate printed on the bond certificate, used to calculate periodic cash interest payments.
  • Market Rate
    The prevailing interest rate for similar bonds in the market, used to determine bond pricing and interest expense.
  • Carrying Value
    The book value of a bond, calculated as face value minus unamortized discount or plus unamortized premium.
  • Present Value
    The current worth of future cash flows, discounted at the market rate, used to determine bond price.
  • Annuity
    A series of equal payments made at regular intervals, such as periodic bond interest payments.
  • Lump Sum
    A single payment made at a specific time, such as the principal repayment at bond maturity.
  • Amortization Table
    A schedule tracking carrying value, cash interest, interest expense, and premium or discount amortization over time.
  • Interest Expense
    The cost recognized each period, calculated as carrying value multiplied by the market rate for the period.
  • Cash Interest Payment
    The periodic payment to bondholders, determined by multiplying face value by the stated rate.
  • Discount on Bonds Payable
    A contra-liability account representing the unamortized portion of bond discount, reducing carrying value.
  • Premium on Bonds Payable
    An adjunct-liability account showing the unamortized portion of bond premium, increasing carrying value.
  • Journal Entry
    An accounting record reflecting interest expense, cash payments, and amortization of premium or discount for each period.