Bond discount amortization is an accounting process that allocates the discount on a bond over the life of the bond. A bond discount occurs when a bond is issued at a price below its face value. This happens as a result of economic influences such as interest rate changes in the market. When a bond is issued at a discount, the issuer records a bond discount liability. The bond discount amortization process gradually reduces this liability and increases the carrying value of the bond until reaches its face value at maturity.
Bond discount amortization is important because it provides a more accurate representation of the bond’s value over time. It also helps to ensure that the issuer recognizes the interest expense associated with the bond over the life of the bond. Historically, bond discount amortization has been a key factor in the development of accounting standards for bonds.