The amount by which the total interest cost associated with a bond issue exceeds the total interest payment. For example, XYZ issued bonds at a market interest rate that is higher than the face interest rate, in which case the bonds were issued at a discount because the market rate increased above the stated rate.

Bond discount= total interest expense – total interest payment

In accounting, the difference between interest expense and payment has to be accounted for (whether it is a discount or a premium). More specifically, the difference (discount in this case) has to be reduced or eliminated to equate the carrying value of bonds payable at maturity with face value by systemically narrowing it down (i.e., the discount) over time. This involves amortization of the discount over the lifespan of the bonds (using either the straight-line method– SLM, or the effective interest rate method.

A bond issued at a discount entails the payment of a market or effective interest rate that is higher than the face rate (on the bond), because the interest cost for the issuer is the sum of stated interest payments and the bond discount:

Interest cost = stated interest payments + bond discount

The bond discount constitutes part of the interest cost because it is the excess amount (over the issue price) that an issuer pays on a bond’s maturity date (to bondholders).