Carrying Value of a Bond

What is a Carrying Value of a Bond?

The carrying value of a bond is the par value or face value of that bond plus any unamortized premiums or less any unamortized discounts. The net amount between the par value and the premium or discount is called the carrying value because it is reported on the balance sheet. You could think of this net amount being carrying to the balance sheet. Carrying value is often called the carrying amount or book value of the bond.

Because interest rates continually fluctuate, bonds are rarely sold at their face values. Instead, they sell at a premium or at a discount to par value, depending on the difference between current interest rates and the stated interest rate for the bond on the issue date. Premiums and discounts are amortized over the life of the bond, therefore book value equals par value at maturity.

What Does Bond Carrying Value Mean?

The carrying value of a bond is that amount stated on the issuing entity’s balance sheet. 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.

What are the Characteristics of a Bond?

Bonds have several characteristics which set them apart from other instruments. These features also dictate the type of bond that companies issue. On top of that, they play a role in several calculations involving bonds, like the carrying value. Some of the fundamental characteristics of a bond include the following.

Face value

The face value of a bond is the amount that it will be worth at maturity. In some cases, this value also represents the amount that companies will receive. However, premiums and discounts also play a role in that. Furthermore, the face value of a bond also plays a role in calculating coupon payments.

Maturity

Maturity is when the bond issuer returns the money lent by the bondholder. In other words, it is when the bond expires. At this date, the issuer repays the holder the face value of the bond. Any coupon payments outstanding will also be payable on this date.

Premium

A premium is when a company issues a bond at a value higher than its face value. For example, when an issuer charges $105 for a $100 bond, the issuance is at a premium. However, any amount exceeding the face value is not repayable to the holder at maturity. This amount becomes income for the company. However, it does not play a role in calculating coupon payments.

Discount

A discount is the opposite of a premium. When a company charges lower than the bond’s face value, it falls under a discount. Unlike the premium amount, companies still have to repay holders the face value. Therefore, any discount offer on the bond becomes an expense for the company. Similarly, the discount does not impact the coupon payments calculation on the bond.

How to Calculate the Carrying Value of a Bond

The effective interest method is the most common way to amortize premiums and discounts, and perhaps one of the easiest methods for calculating carrying values.

Let’s assume that a company issues three-year bonds with a face value of $100,000 that have an annual coupon of 9%. Investors view the company as being relatively risky; thus, they are willing to willing to buy this bond only if it offers a higher yield of 10%.

Because the yield to maturity (10%) is higher than the coupon rate (9%), this bond will be sold at a discount. Therefore, its carrying value will be less than its face value ($100,000).

You can calculate the carrying value of the bond by typing in the relevant pieces of information into a finance calculator or spreadsheet (use the PV function).

FV = $100,000 (par value)
N = 3 (number of periods)
PMT = $9,000 (9% coupon rate X $100,000 par value)
INT = 10% (Investors required yield to maturity)

Solve for PV to get -$97,513.15, or the amount the investors will pay for these bonds to get a 10% yield to maturity. This is the carrying value at the time it is issued, $97,513.15.

What if you need to calculate the carrying value after two years of interest payments for the same bond? Simple. Run the same calculation, changing only the number of periods from three to one.

FV = $100,000 (par value)
N = 1 (number of remaining periods)
PMT = $9,000 (9% coupon rate X $100,000 par value)
INT = 10% (Investors’ required yield to maturity.)

Solving for present value, we arrive at -$99,090.91, or the amount investors would pay for this bond. Thus, its carrying value is $99,090.91, a smaller discount to its face value.

Calculating the carrying value of a bond using the effective interest method is as simple as calculating what the bond would be worth at a given yield to maturity. As yield to maturity goes up, the value of the bond will go down. Similarly, as yield to maturity goes down, the value of the bond will go up, resulting from the bond’s “inverse relationship” with interest rates.

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.

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