Fixed income instrument

chandniwadhwani92
Finance Junkie
Posts: 166
Joined: Mon Oct 06, 2014 7:36 am

Fixed income instrument

Postby chandniwadhwani92 » Mon Jan 12, 2015 10:58 am

PURE DISCOUNT AND OTHER BONDS SOLD AT DISCOUNT TO PAR WHEN ISSUED ARE TERMED AS ORIGINAL ISSUE DISCOUNT
Because the gain over an OID bonds tenor as price moves towards is par are real interest incomes. These bonds generate tax liability eve no cash interest payment has been made
In many tax jurisdiction portion from discount to par is treated as taxable interest income each year
The tax basis also allows that the tax basis of OID bonds is increased each year by the amount of interest income recognized , so there is no additional tax liability at maturity
MY QUESTION
HOW THERE IS NO ADDITIONAL CAPITAL GAIN TAX LIABILITY AT MATURITY
sOURCE OF QUESTION- SCHWESER
PAGE-15
FIXED INCOME

edupristine
Finance Junkie
Posts: 722
Joined: Wed Apr 09, 2014 6:28 am

Fixed income instrument

Postby edupristine » Mon Jan 19, 2015 7:55 am

Hi, your answer to both question is that bond moves automatically to par whether issued at discount or premium. this is the concept of constant price trajectory. Also, as there are no coupon payments in the pure discount bonds and they are paid once at the par. amount received at the par is more than what the investor paid in the beginning so the amount is interest income and the bonds automatically deduct taxes from the interest income and hence there are no capital gains or tax liability at the future when bonds are redeemed.


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