Glossary of Municipal Securities Terms

AMORTIZATION OF PREMIUM

An accounting process by which the book value of a security purchased at a premium above par or the accreted value is decreased during the security’s holding period. The amortization reflects the decrease in the security’s value as it approaches the redemption or maturity date. Under a “straight line” amortization method, the amount of the yearly amortization is the same for all years and is equal to the product of the total amount of the premium divided by the number of years to redemption or maturity. Under a “constant interest” amortization method, the amount of the yearly amortization decreases as the redemption or maturity date approaches and for any semi-annual period is equal to (a) the current interest payment less (b) the original semi-annual yield to maturity multiplied by the current book value. See: ORIGINAL ISSUE PREMIUM; PREMIUM. Compare: ACCRETION OF DISCOUNT.

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