Premium Amortization Effective Method – Effective Method Calculation

We will calculate the amortization of a bond premium using the effective method the preferred method under GAAP. The effective method can be compared to the straight line method. Under the straight line method we divide the premium by the number of payments and reduce it by an even amount each period. Under the effective method we calculate the amount allocated to interest each period using the carrying value and the market interest rate..
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