If an insurer purchases a U.S. Treasury bond at a discount from its face value, next year's financial statements will indicate that the effective coupon payment is higher than the actual coupon payment received.

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When a bond is bought at a discount, the yield to maturity is higher than the coupon rate. In insurer accounting, the effective interest method is used to recognize interest income. This means the interest income for a period is the bond’s carrying amount at the start of the period multiplied by the bond’s effective interest rate (the yield at purchase). The cash coupon payment, however, is fixed and equals the coupon rate times the face value.

Because the carrying amount at purchase is below face value, applying the higher effective rate produces interest income that exceeds the cash coupon received. The difference is the amortization of the discount, which increases the carrying amount over time toward the face value. The bond’s face value itself doesn’t rise; the discount is gradually amortized. Hence, next year’s reported interest (the effective coupon) is higher than the actual cash coupon received.