Discount bonds are the bonds that are sold at a price below the face value during the issue. Rising interest rate is the main reason of fall in bond prices. Potential investors are highly interested in buying these bonds to achieve specific financial goals. There remain differences in market value and considering this, bonds are priced according to the market values. Discount bonds provide investors automatic call protection. All types of bonds like Treasury bonds and Municipal bonds can be sold as discount bonds. With the rise of interest rates, a potential investor may find more discounted bonds in the market.
Short-term bonds are usually issued as discount bonds. According to investorwords.com, discount bonds may be defined as “A bond, which is sold at a price below its face value and returns its face value at maturity. Also called discounted
bond.”(http://www.investorwords.com/1472/discount_bond.html) Discount bonds can offer investors automatic call protection, as their coupon rates are lower if compared with the prevailing interest rates in the market. The bond issuer usually pays at least the face value at the time of redemption. This increases the issuer's call cost. Discount bonds are readily salable and the interests are paid every six months or on half-yearly basis. Discounted bonds, when sold at a substantial interest rate, called deep-discount bond. Though there remain high risks associated to the discount bonds, many of the investors are offering discount bonds for popularity of low coupon rate.
Interests of discount bonds are not treated as capital gains; the interest income is treated as ordinary income. Any loss is treated as capital loss, discount bonds are in high demand and leading financial advisory service providers are now supporting the purchase of discount bonds. For the bonds other than discount bonds, any gain after sale, maturity or redemption is taxed at capital gain rates. In any case, if the investor has unused interest expenses, that is deducted against the income from interest.
Tax-exemption offering discount bonds, purchased after April 30 of 1993 and if any of them has a gain between the market discount and the resulting value of the redemption, sale or maturity of the bond will be taxable as interest from income but not as capital gain.
Short-term bonds are usually issued as discount bonds. According to investorwords.com, discount bonds may be defined as “A bond, which is sold at a price below its face value and returns its face value at maturity. Also called discounted
bond.”(http://www.investorwords.com/1472/discount_bond.html) Discount bonds can offer investors automatic call protection, as their coupon rates are lower if compared with the prevailing interest rates in the market. The bond issuer usually pays at least the face value at the time of redemption. This increases the issuer's call cost. Discount bonds are readily salable and the interests are paid every six months or on half-yearly basis. Discounted bonds, when sold at a substantial interest rate, called deep-discount bond. Though there remain high risks associated to the discount bonds, many of the investors are offering discount bonds for popularity of low coupon rate.
Interests of discount bonds are not treated as capital gains; the interest income is treated as ordinary income. Any loss is treated as capital loss, discount bonds are in high demand and leading financial advisory service providers are now supporting the purchase of discount bonds. For the bonds other than discount bonds, any gain after sale, maturity or redemption is taxed at capital gain rates. In any case, if the investor has unused interest expenses, that is deducted against the income from interest.
Tax-exemption offering discount bonds, purchased after April 30 of 1993 and if any of them has a gain between the market discount and the resulting value of the redemption, sale or maturity of the bond will be taxable as interest from income but not as capital gain.
