6.3.1. 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 an 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 over the life of the loan. Likewise, when a tax-exempt municipal bond is purchased at a premium, the bondholder will write off the premium over the remaining life of the bond. For tax-free municipal bonds, the amortized amount is not deductible in d