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How to Calculate the Unamortized Bond Premium

By Motley Fool Staff – Updated Nov 7, 2025 at 8:52 PM EST

Key Points

Bonds bought above face value add cost paid as "unamortized bond premium."
Reduce premium annually to align bond's book value with redemption value at maturity.
Consult tax advisor on premium tax deductions to optimize investment's return.
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Bond prices move up and down constantly, and it's common for bond investors to face situations where they have to pay more than the face value of a high-interest bond in order to persuade the current owner to sell it. If you pay a premium to a bond's face value, you can amortize that premium over the remaining term of the bond. Doing so requires that you keep track of the unamortized bond premium so that you can make the appropriate calculations for annual amortization. Below, we'll take a closer look at buying bonds at a premium and handling them correctly for tax purposes.

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For the second year, you've already amortized $6 of your regular bond premium, so the unamortized bond premium is $80 minus $6, or $74. Multiply $1,074 by 5% to get $53.70, subtract it from $60, and you can see that you'll amortize $6.30 in the second year, leaving you with $67.70 in unamortized bond premium.

By amortizing your bond premium, you can get tax benefits during the course of owning the bond, rather than having to wait until you sell it or until it matures. The method requires that you keep track of your unamortized bond premium, but that's a small price to pay for tax savings.

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