How Can I Calculate the Carrying Value of a Bond?

The carrying value of a bond refers to the amount of the bond’s face value plus any unamortized premiums or less any unamortized discounts. The carrying value is also commonly referred to as the carrying amount or the book value of the bond.

Since 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.

Calculating the Carrying Value of a Bond

The first step in calculating carrying value requires determining the terms of the bond. For instance, using the effective interest rate method, the following three bond characteristics must be isolated:

1. The bond’s par value
2. The bond's interest rate
3. The bond's time to maturity

After locking in these values, one must determine if a bond is sold at face value, at a premium or at a discount.

A bond with an interest rate equal to current market rates sells at par. If current market rates are lower than an outstanding bond's interest rate, the bond will sell at a premium. If current market rates are higher than an outstanding bond's interest rate, the bond will sell at a discount.

You must also determine the amount of time that has passed since the bond’s issuance plus how much of the premium or discount has amortized. Typically, amortization is calculated on a straight-line basis. That is, the same amount is amortized for each reported period.

Once you've gathering this information, you can use a carrying value calculator such as a bond price calculator to determine the carrying value of the bond.

In the next section, you'll see an example of the calculation using the straight-line amortization method. Ultimately, the unamortized portion of the bond's discount or premium is either subtracted from or added to the bond's face value to arrive at carrying value.

Example of Calculating the Carrying Value of a Bond

Say company XYZ issued bonds with a face value of $1,000 and a term of five years. They sold at a premium of $1,100. Assume a year has passed since the bond was issued. Here's how to calculate the carrying value using the straight-line method,

Start by determining the unamortized amount:

Premium over face value/term = amortized amount per year

$100/5 years = $20

$20 per year x 1 year (of the 5-year term that has passed) = $20

$100 - $20 = $80 (the amount of the premium that remains unamortized).

Next, determine the carrying value:

Carrying value = Face value + unamortized premium

Carrying value = $1000 + $80

Carrying value = $1080

The carrying value at this point in time is $1080.

How Is a Bond's Carrying Value Recorded?

The information relating to carrying value is reported via various accounts on a company's balance sheet. That is, face value is recorded as a credit balance in the Bonds Payable account. Unamortized premium is recorded as a credit balance in the Premium on Bonds Payable liability account. Unamortized discount is recorded as a debit balance in the Discount on Bonds Payable contra-liability account. The current value is recorded as a long-term liability.

The Bottom Line

The carrying value of a bond is the sum of its face value plus unamortized premium or the difference in its face value less unamortized discount. It can be calculated in various ways such as the effective interest rate method or the straight-line amortization method. It's carried on a company's balance sheet.

Also known as book value, the carrying value of a bond represents the actual amount that a company owes the bondholder at any given time.