**How to Calculate Amortization and Income on the Investments or Financial Instruments Classified 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:__

**the value of Security after amortization (Purchase cost/Opening Amortized Cost – amortization for the period = amortized cost as at the period ended)**

__Amortized cost:__

**Face Value * Coupon Interest Rate.**

__Coupon interest__=

**PurchasedCost/Amortized Cost * Effective Interest Rate (IRR)**

__Effective Interest__=

__Amortization/(Discount):__Amortization/(Discount) = Coupon interest - Interest at Effective rate/IRR = Amortization/(Discount) for the period.

**= Purchased Cost/Opening Amortized Cost– Amortization for the period – Principal Redemption (if any)**

__Amortized Cost:__

__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 below to Download Complete Amortization Guide__

__for Investment in MS-Word format.__ amortization_of_investments.doc | |

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18_april_2011.xls | |

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