How to Calculate Amortization and Income on the Investments or Financial Instruments Classified
as Held to Maturity (HTM)
as Held to Maturity (HTM)
Only the Investments Classified as Held to Maturity are recorded in books at amortized Cost.
Q.1 When Amortization/Discount is required?
Ans. Amortization is required when securities (Investments) are purchased at the price higher than its Face Value.
And Discount calculation is required when the Securities (Investments) are purchased at the price lower than its Face Value.
Q#2 What is the Effect of Amortization/Discount.
Ans#2 Amortization is treated as an Expense and Discount is treated as Income.
Q#3 How to Amortize the premium/(discount) on the Investments (securities).
Ans. Premium/(discount) on Investment are to be amortized over the Maturity period of the Investment.
Key Terms:
Premium: The Excess amount paid on the purchase of any Securities (Investments).
Discount: The Securities purchased at less than the Face value (at Discount)
Amortization = Coupon interest amount – Interest calculated at effective rate (at IRR).
Coupon interest: is interest calculated at the coupon rate, which is actually received.
Effective interest: is calculated using the (IRR=Internal Rate of Return)
IRR (Internal Rate of Return): is the rate where the return is Zero. (the rate of return where no loss and no profit arise.)
Face Value it is the security’s actual value/Price.
Purchase Cost: is the cost at which securities are purchased (Ex. A security having face value of 100,000 is purchased at the cost of 125,000 the difference between the face value and cost is the premium paid = 25,000)
Formulas:
Amortized cost: the value of Security after amortization (Purchase cost/Opening Amortized Cost – amortization for the period = amortized cost as at the period ended)
Coupon interest = Face Value * Coupon Interest Rate.
Effective Interest = Purchased Cost/Amortized Cost * Effective Interest Rate (IRR)
Amortization/(Discount):
Amortization/(Discount) = Coupon interest  Interest at Effective rate/IRR = Amortization/(Discount) for the period.
Amortized Cost: = Purchased Cost/Opening Amortized Cost– Amortization for the period – Principal Redemption (if any)
ABC Ltd PIBs  10 Years
For the year ended 31 December 2009 Issue Date 18Apr01
PIB HELD TO MATURITY Maturity Date 18Apr11
Purchase cost 5,005,570
Face value 5,000,000
IRR (Half yearly) 6.976%
Coupon Rate 14%
S#

Coupon Date

Interest / Redemption

Principal Redemption

Interest Income on IRR Basis

Discount/ Amortization

Closing Balance/ Amortized Cost
 
Formula

F.V*Coup. Rate/2

As per Agreement

Purch. Cost * IRR

Int as per Coup. Rate  Int as per IRR

Opining. Amort. Cost
– Prncple Redemption
Amort.
 
1

18Apr08



5,005,570
 
2

18Oct08

350,000



349,221

779

5,004,791
 
3

18Apr09

350,000



349,167

833

5,003,957
 
4

18Oct09

350,000



349,108

892

5,003,066
 
5

18Apr10

350,000



349,046

954

5,002,112
 
6

18Oct10

350,000



348,980

1,020

5,001,092
 
7

18Apr11

350,000

5,000,000

348,908

1,092


 
5,570
 
Amortization period

Days for the period

Total Days

Total Amortization for the year

Apportioned Premium
 
From 1 Jan to 18 April 09

108

182

495
 
From 18 April to 18 Oct 09

183

181

892
 
From 18 Oct to 31 Dec 09

74

182

388
 
1,774
 
Amortized cost as at 18 Oct, 2009

5,003,066
 
Amortization from 18 Oct to Dec 31,09

388
 
Amortized cost as at 31 Dec 2009

5,002,678
 
Ledger Entries:
At the time of purchase:
Debit Credit
Investments 5,005,570
Cash/Bank 5,005,570
At the year ended 31 Dec, 2008:
Income Receivable/Cash/Bank 492,308
Coupon interest 492,308
Amortization Expense 1,118
Investments 1,118
At the year ended 31 Dec, 2009:
Income Receivable/Cash/Bank 700,000
Coupon interest 700,000
Amortization Expense 1,774
Investments 1,774
At the year ended 31 Dec, 2010:
Income Receivable/Cash/Bank 700,000
Coupon interest 700,000
Amortization Expense 2,030
Investments 2,030
At the year ended 31 Dec, 2011:
Income Receivable/Cash/Bank 207,692
Coupon interest 207,692
Amortization Expense 566
Investments 566
Click the Links Below to Download the Amortization Schedule in MSExcel
Click the Links Below to Download the Amortization Schedule in MSExcel