Premium on Bonds

If you pay a higher price for a bond than what it is worth at maturity because the bond pays a higher rate of interest than the current market, then you have the option of reducing your yearly interest income by the amortization of the premium or increasing your basis in the bond when it matures which reduces your capital gain or increases your capital loss. Some brokers provide a schedule of bond accretion or amortization to help you with this process and also calculate the adjusted bond basis in the schedule of realized gains and losses. Usually it is much easier and not really worth it to consider bond amortization and just leave the premium in your basis in the bond.