T11F-Chp-03-1A-Bond Review Slides

T11F-Chp-03-1A-Bond Review Slides - Chapter 4A Income-...

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Chapter 4A Income- Exclusions Bonds and Original Issue Discount Edited September 14, 2008
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Original Issue Discount . Pg. 114 Some debt instruments are issued at prices below their maturity values This original issue discount (OID) is effectively interest paid at maturity rather than periodically over the debt instrument’s life Both cash and accrual basis taxpayers recognize OID income as it accrues Exception: Series EE bonds
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Market Discount. Bonds purchased after issue in the open or secondary market at a price below maturity value. Excess of redemption proceeds over cost is recognized as ordinary income in year of redemption. Electively, market discount can be accrued as interest income over life of bond.
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Bond IIlustration – Slide 1 of 11 On 1-1-07 , issue $100,000 of bonds. On 12-31-08 the bonds will mature. Bonds have stated interest of 10%. Bonds pay interest of $5,000 each 6 months. On 1-1-07, Bob buys the bonds from the Corp. at a price to yield 12% (semi-annual compounding). Compute price paid by Bob by discounting cash flows at 6% per interest period.
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June Dec. June Dec PV $5,000 PV $5,000 PV $5,000 PV $5,000 PV $100,000 Price Bond IIlustration – Slide 2 of 11 2007 2008
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T11F-Chp-03-1A-Bond Review Slides - Chapter 4A Income-...

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