The amortized cost is the category, used in the valuation of financial instruments. This is a category accounting (bookkeeping) to serve for the valuation of financial assets and financial liabilities.

The amortized cost (amortized cost) is the purchase price at which the financial asset or financial liability was first introduced to the books of account (ie, the initial value), less the repayment of the nominal value (core capital) and properly adjusted for the cumulative amount of the discounted the difference between the initial value of the component and its value at maturity, calculated using the effective interest rate, and decreased by write-downs.

To define the concept of amortized cost we use the concept of the effective interest rate, which is hidden under the foot, which is followed by discounting to present value of the related financial instrument of the future cash flows expected over the period to maturity, and in the case of instruments with variable interest rate - the date of the next estimate by the market benchmark.

The effective interest rate is therefore an internal rate of return (ie. IRR) of an asset or a financial liability for the period.

When calculating the cumulative amount of the discount of financial assets and financial liabilities using the effective interest rate are taken into account all fees paid or received between parties to the contract.

Main page Other posts