Bond Quotation & Interest

quotes, tax

what rate is interest on corporate bonds taxed

ordinary income at all levels. bond interest is deductible against a corporations taxes

taxing premium corporate bonds

1. taxed when bond matures or is sold

2. amortize premium annually (amount amortized each use can be used to offset taxable interest income, reduces adjusted cost basis until at end adjusted cost basis equals bonds redemption value. if this is done and maturity no capital loss)

taxing discount corporate bonds

1. taxed when bond matures or is sold

2. accrete discount annually (accreted discount is taxable as ordinary income)

how are zero coupon bonds taxed

dont pay interest, but portion of discount is taxable each year, known as phantom income. discounted interest will be accreted and added to bonds cost basis.

determine net yield of a corporate bond

coupon rate x (1 - tax rate)

taxable equivalent yield of muni bond (or gov if you only add fed tax rate)

coupon rate / (1 - tax rate)

bank qualified bonds

defined as public interest bonds whose issuer offers no more than $10 mil of tax exempt bonds during a single calendar year. if money is invested in these, banks an deduct 80% of interest paid on deposits. bc of that issuers of these bonds can offer them at slightly lower interest rates than non bank qualified bonds

taxing muni bonds in the second market (premium, discount, zero coupon)

• premium: must amortize premium over bonds life

• discount: do not have to accrete

• zero coupon (original discount): discount must be accreted over life of bond, annual accretion is non-taxable muni interest income, if bond is held to maturity there is no capital gain

taxing issued muni bonds (premium & discount)

• premium: premium must be amortized

• discount: must be accreted

taxing us government bonds

• premium: may be amortized, does nto have to be

• discount: working on it

percentage of par quote

1 point = 1% of par = $10

trading at 100 = par

corporate bond type & quote

1/8% par value, usually term bonds

muni bond type & quote

1/8% par value, most long term are serial so yield basis

if term then percentage of par

treasury bond type & quote

1/32% par value, usually term bonds

what is “basis” another term for?

yield to maturity

yield quote

1 basis point (bp) = 0.01% or 0.0001 = $0.10

when quote = coupon rate, trading at par