Amortization and Accretion
Amortization is the gradual writing off of the cost of an asset over its useful life. Tangible assets, such as machinery, decline in value over time because they age with use or become obsolete. The amortization of tangible assets is usually called depreciation.
The term amortization also applies to intangible assets. Intangible assets are typically assets that can’t be touched or held, such as patents, trademarks, or copyrights. Amortization refers to the asset’s decline in value over time, as it approaches the end of its life. The end of life of an intangible asset is often its expiration date.
A municipal bond’s premium operates the same way as the principal of a home mortgage. Rather than pay back the entire principal of a home mortgage on its redemption date, the principal is amortized, or gradually paid down, in equal annual payments over the life of the loan. When a tax-free municipal bond is purchased at a premium to par, the premium is amortized, or paid down, over the remaining life of the bond. The amortized amount cannot be deducted from the interest of taxable bonds. However, it is reported to the IRS and deducted each year from the purchaser’s reportable tax-exempt interest.
Not all assets depreciate over time. Some, such as land,