How to Calculate the Carrying Value of a Bond

Due to the fluctuation in interest rates, it’s rare that a bond sells at its face value. A bond is more likely to sell at a premium or at a discount to its par value, which is determined by the difference between the interest rate on the bond’s issue date and the current interest rate.

Consequently, a bond’s carrying value, or book value, equals its face value plus unamortized premiums or minus amortized discounts. Any premium or discount is amortized over the bond’s term. So, at the bond’s maturity, the bond’s book value equals its par value.

Read More:How Do Bonds Work?

Bond Carrying Value Calculation

To calculate a bond's carrying value, you must know its terms:

  • Bond’s Par Value​: The dollar value that a bond issuer promises to repay a bondholder at the bond’s maturity date.
  • Bond Interest Rate​: The fixed rate of interest, or coupon rate, the bond pays until it matures.
  • Bond’s Time Until Maturity​: The time period during which the owner will receive interest payments from the bond’s issuer.

Consider the Bond’s Interest Rate

Once you know the bond’s par value, determine if the bond was sold at its face value, at a premium or at a discount.

If the bond’s interest rate equals the current market rate, it sells at par.If the bond’s interest rate is higher than the current market rate, it sells at a premium.If the bond’s interest rate is lower than the current market rate, it sells at a discount.

Identify Bond Discount or Premium

A bond sells at a discount if investors require a higher interest rate than the bond's stated rate. Consequently, an investor pays less to purchase the bond than the bond's face value. In turn, a bond sells at a premium if the bond's interest rate is higher than the market rate. In this case, an investor pays more to purchase the bond than the bond's face value.

Due to the fluctuation in interest rates, is common for a bond to trade at a discount or premium. Both the discount and premium are amortized over the bond's lifetime so that its face value equals its carrying value when it reaches maturity.

Determine Bond's Outstanding Period

Next, you determine the time period between the bond’s issuance and its maturity. The bond’s premium or discount will be amortized over that period. By knowing the amount of the premium or discount that has been amortized, you can calculate the carrying value. Often amortization occurs on a straight-line basis, meaning the same amount is amortized for each reported period.

The Carrying Value of a Bond

By knowing the amount of the premium or discount that has been amortized, you can calculate the bond's carrying value. Often amortization occurs on a straight-line basis, meaning the same amount is amortized for each reported period.

To calculate the bond’s carrying value, either subtract the unamortized portion of the bond's discount from the bond’s face value or add the bond’s premium to the bond's face value:

Bond Carrying Value = Bond Face Value - Unamortized Bond Discount

or

Bond Carrying Value = Bond Face Value + Bond Premium