Effective interest method

CFA Level I Glossary

Under the effective interest method, each period’s interest expense (or income) equals the market yield at issuance times the current carrying amount. The difference between cash coupon and interest expense amortizes premium or discount so the bond walks toward par. It is the amortized-cost schedule used in fixed-income accounting. Straight-line amortization is simpler but not the conceptual default in IFRS and US GAAP for this purpose.

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