What does it mean when you amoritize a bond. I know what to do when I solve problems and I think I know what it means but I just need someone to just clarify it for me what it means (not in the sense of a straight definition)
“Amortize” means “pay off over time.”
A nonamortizing bond (sometimes called a “bullet” bond) pays all of the principle at the end: coupon, coupon, . . . coupon, (coupon + principle). This is how you normally think of a bond: a T-Note, T-Bond, corporate bond, whatever.
An amortizing bond pays off the principle a little with each payment: think “mortgage”: (coupon + some principle), (coupon + some principle), . . . , (coupon + remaining principle).
Ah I see… and a bond “has” to be amoritized if you buy it at a discount right? because the issuer has to pay you the amortized amount till you get to your par value at maturity?
Then am I correct to say a nonamoritizing bond is issued at par value?
thank as always.
If you issue a bond at a premium or a discount, _ that premium or discount is amortized _ over the life of the bond: it’s a gain/loss that you’re charging (to interest expense) over time. The bond itself may be amortizing or not; that’s a separate issue.
Again, just to be clear: you can issue a bullet bond at a premium, at par, or at a discount, and you can issue an amortizing bond at a premium, at par, or at a discount. (The issue price will depend on market rates and the coupon rate on the bond.)
You’re more than welcome.