How Do You Use The Straight-Line Method Of Amortization Schedules?
Straight-line amortization is a simple method of realizing an investment truth: that a premium bond, all things being equal, must decline to par or its maturity value over time. There are other more complicated amortization techniques available, notably the scientific or constant interest method. Amortization must be computed to the most likely occurrence, maturity or any earlier call feature. The collected values for each year of the amortization period are called the “amortization schedule.” Know that amortization reflects the economic fact that a security sold at a premium must decline to its maturity or redemption price. The principle is similar to the use of depreciation that prices property to its lowest redeemable price when it is no longer useful. Compute the par value, cost and maturity of the bonds purchased. Assume $1,000,000 par amount, $1,250,000 cost and 10 years to maturity. Subtract the premium from the par (or maturity) amount. The amount to be amortized is $250,000. C
