4 Business Organizations with Tax Planning § 66.07

Summary

When an investor pays more for a bond than the amount payable at maturity, the excess is “bond premium.” The investor pays the premium because the bond pays an above-market interest rate. Thus, a part of the interest the investor receives over the life of the bond actually represents a return of the premium. For this reason, the I.R.C. allows the purchaser of a bond to amortize any premium over the life of the bond.1

For the purposes of the amortization provision, a bond is any bond, debenture, note, or certificate or other evidence of indebtedness issued by a corporation, government, or political subdivision. However, it does not include obligations which are inventory or stock of trade, or are held for sale to customers in the ordinary course of business.2

Amortization of bond premium on tax-exempt bonds is mandatory.3