Quick Answer: What Is A Bond Premium On A Tax Exempt Bond?

How do you know if a bond is premium or discount?

Said another way, if a bond that is trading on the market is currently priced higher than its original price (its par value), it is called a premium bond.

Conversely, if a bond that is trading on the market is currently priced lower than its original price (its par value), it is called a discount bond..

Is Bond premium an asset?

Premium on bonds payable is the excess amount by which bonds are issued over their face value. This is classified as a liability, and is amortized to interest expense over the remaining life of the bonds. … In this case, investors are willing to pay extra for the bond, which creates a premium.

What is a bond discount?

The bond discount is the difference by which a bond’s market price is lower than its face value. For example, a bond with a par value of $1,000 that is trading at $980 has a bond discount of $20. … Bonds are sold at a discount when the market interest rate exceeds the coupon rate of the bond.

What is a bond premium?

A premium bond is a bond trading above its face value or in other words; it costs more than the face amount on the bond. A bond might trade at a premium because its interest rate is higher than current rates in the market.

What is acquisition premium on tax exempt bonds?

acquired with acquisition premium. Box 11. For a tax-exempt obligation that is a covered security acquired on or. after January 1, 2017, shows the tax-exempt OID on the obligation for the part. of the year you owned it.

Is OID on Tax Exempt Bond taxable?

For taxable OID bonds, accrued OID must be recognized annually as taxable interest income. For tax-exempt municipal OID bonds, this income is not subject to the ordinary income tax, although it is required to be reported for informational purposes in the same manner as other tax-exempt bond interest.

How much interest income will he report this year if he elects to amortize the bond premium?

If David elects to amortize the $2,000 bond premium, he will use the constant yield method (similar to the effective interest method used to amortize bond premium under GAAP) to amortize the bond premium semiannually. Ultimately, he will report $599 of interest income from the bond.

How do you calculate bond premium?

The total bond premium is equal to the market value of the bond less the face value. For instance, with a 10-year bond paying 6% interest that has a $1,000 face value and currently costs $1,080 in the market, the bond premium is the $80 difference between the two figures.

How is tax exempt OID reported?

Box 8 shows the Original Issue Discount (OID) amount on a U.S. Treasury obligation for portion of the tax year that the taxpayer owned the Treasury obligation. … This amount should be reported on the federal return as interest income but it is considered exempt from taxation for state and local income tax purposes.

Is it better to buy a bond at a discount or premium?

A basic rule of thumb suggests that investors should look to buy premium bonds when rates are low and discount bonds when rates are high. In other words, buy the coupon where you think rates are headed.

How do you report bond premium on tax exempt bonds?

Tax-exempt interest. However, if you acquired a tax-exempt bond at a premium, only report the net amount of tax-exempt interest on line 2a of your Form 1040 or 1040-SR (that is, the excess of the tax-exempt interest received during the year over the amortized bond premium for the year).

Where does bond premium on tax exempt bonds go on the tax return?

If the bond yields tax-exempt interest, you must amortize the premium. This amortized amount is not deductible in determining taxable income. However, each year you must reduce your basis in the bond (and tax-exempt interest otherwise reportable on Form 1040, line 8b) by the amortization for the year.

Is OID taxable interest?

Original issue discount (OID) is a form of interest. … For bonds issued after 1984, the OID is treated as interest. It’s taxable as it accrues over the term of the bond. You also get to increase your basis in the bond by the amount of OID included in income.

Is a bond premium a debit or credit?

The unamortized premium on bonds payable will have a credit balance that increases the carrying amount (or the book value) of the bonds payable. The unamortized discount on bonds payable will have a debit balance and that decreases the carrying amount (or book value) of the bonds payable.

How is bond premium handled on tax return?

Subtract the bond premium amortization from your interest income from these bonds. Report the bond’s interest on Schedule B (Form 1040A or 1040), line 1. Under your last entry on line 1, put a subtotal of all interest listed on line 1. Below this subtotal, print “ABP Adjustment,” and the total interest you received.

Is OID taxable income?

Form 1099-OID, “Original Issue Discount,” is the IRS form that you received if you must include an amount of OID in your taxable income. OID is the excess of an obligation’s stated redemption price at maturity over its issue price, and it is taxable as interest over the life of the obligation.

Why would anyone buy a premium bond?

A person would buy a bond at a premium (pay more than its maturity value) because the bond’s stated interest rate (and therefore its interest payments) are greater than those expected by the current bond market. It is also possible that a bond investor will have no choice.

What is Bond premium on 1099 INT?

Bond premium generally occurs when a covered security is acquired for an amount greater than the face value of the bond and the stated redemption price of a bond at maturity is less than the basis in the bond at the time it was acquired.