For accounting purposes, the discount is treated as interest expense by the issuer, and as interest income by the investor, and is recognized as such in their accounting records.
Accounting: A Management Approach.Investors purchasing previously issued OID bonds at less than face are also subject to this provision.Recent changes in the Internal Revenue Code that lowered long-term capital gains tax rates to (generally) a maximum of 20 percent, are causing many investors to reexamine their investing strategies in tax-deferred accounts.The amount of an original issue discount can be particularly large when the issuer sells zero-interest bonds.Tigrs: Merrill Lynch's Treasury Investment Growth Receipts.A zero coupon bond (also referred to simply as a zero) has no stated or coupon interest rate and therefore pays no periodic interest.The accurate determination of principal and interest is necessary in United States tax law to determine the basis of property and to determine whether an amount paid is deductible and includible as interest, or simply a nontaxable debt repayment.Section 1272(a) of the tax code requires that the Original Issue Discount is includible in the lender's taxable income at the end of each tax year, or part of the tax year if the loan was not owned for the full year.Another disadvantage is the very large cash outflow required at maturity compared to the original proceeds of the issue (but, of course, the firm didn't have to make all of the usual periodic interest payments).
Since zeros have no stated or coupon interest rate, no interest is either paid or received annually.
Investors in OID debt with a coupon or stated interest rate will pay income taxes on both the periodic interest payments received and the annual amortization of the OID.
When the issuer redeems the bond, it pays the investor the full 1,000 face value of the bond.Because of the need to pay tax on income never received in cash and the increase in marginal tax rates between 19, the demand for taxable zeros has dried up in recent years.Assuming market raffle ticket printers liverpool interest rates remain at 7 percent, our.0 percent, 20-year zero, compounded semiannually, per 10,000 face value, if held by the original purchaser, would have the values shown in Table.Upper Saddler River, NJ: Prentice Hall, 1998.In the face of high debt costs, declining demand, and decreasing bond ratings, municipalities began issuing zeros with.S.Cats: Salomon Brothers' Certificate of Accrual on Treasury Securities.Broker/dealers developed portfolios of zcbds bearing the name of aggressive, coy animals: lions: Lehman Brothers' Lehman Investment Opportunity Notes.Further, because it has no coupon rate, a zero coupon bond's price volatility, as market rates change, is substantial.